Updating a core system has been likened to fixing an aeroplane’s engine in mid-flight. Competition, regulation and the inflexibility of legacy systems are major obstacles, each of which require investment in time and infrastructure to overcome. Wendy Atkins explains.
Although many banks worldwide are still operating core systems built at least 15 years ago, banking system suppliers are reporting an increasing interest in infrastructure updates from leading banks.
However, there is more than one way of updating a core system, as Karim Peermohamed, chief operating officer at core systems provider Financial Objects, explains: “In retail banking, the big banks have systems dating back many years. They now want to improve one aspect of their business, such as their mortgage processing capability. Once this has been done, they then turn to other areas of the business, such as fixed-term deposits or current accounts. So the trend seems to be that they are replacing their infrastructure piecemeal, rather than all at once.”
System overhaul
How long it takes to completely change a core banking system varies from organisation to organisation. UK independent private bank C Hoare began updating its system in 2002 with activebank technology from Financial Objects. The first part of the system to be implemented was the Treasury application, followed about six months later by the adoption of a retail application in the bank’s foreign currency banking operations.
In July 2004, the next phase of the implementation provided straight-through processing using the Treasury system and full automation to Swift, the industry-owned co-operative supplying secure, standardised messaging services and interface software. The final stage was delivered at the end of 2004 when all of the bank’s sterling banking and payment operations adopted activebank Retail.
In the US, Webster Bank made a decision to switch its core system in December 2003. After reviewing its competitors, it chose to replace its original Miser platform with Systematics from Fidelity. Unlike many other financial institutions, Webster decided on a big-bang conversion – and migrated 20 of its 24 major IT systems over a two-year period. The bank’s decision to change core systems was based on requirements for flexibility, integration and scalability. It decided to take the big-bang route because it was more cost efficient for the bank.
As industry analyst Celent points out in its report Overcoming the Fear Factor: Migrating Core Banking Systems: “[the bank] didn’t want to be a two mainframe shop, running both Unisys mainframes for Miser and IBM mainframes for the Fidelity Systematics solution.”
Furthermore, the big-bang approach was seen as being strategically safer than a string of conversions that could have taken up to 10 years to complete.
Drivers for change
Whether a bank takes a big-bang or a piecemeal approach to updating its system, the drivers to change will be similar. Although the existing technology may still be good, it was clearly built for a different era. “Channel and product proliferation have created increasing complexity. Rolling out new products now requires many channels to be supported, dramatically increasing the time from concept to launch,” says Celent.
“There has been a focus on customer centricity driving cross-selling and relationship pricing, and legacy systems have been scrambling to catch up. Customers are now demanding real-time information like never before, via the internet, interactive voice response [IVR], ATMs and at branches.
“These channels all need to provide the same answer – and the correct one – to the customer. The data requirements of Basel II are much more easily delivered with real-time relational databases than they are with batch systems running flat-file ones.”
Mr Peermohamed at Financial Objects agrees: “In the retail banking sector, competitive advantage and wanting to know customers better is a clear driver for change. In the wholesale banking sector, changing core systems is much more about compliance and operational risk (for example, Basel II, Sarbanes-Oxley, anti-money laundering). In fact, the whole area of compliance has become so complicated that bank CEOs are now saying they need something that has the agility and flexibility to cope with the numerous regulations while enabling them to run their business properly.”
Cost can also be a powerful driver, as David Worthington, senior consultant at consultancy and software solutions provider Aconite, points out: “It can be expensive to maintain legacy systems, particularly given the problems associated with integrating different silos.”
The inflexibility of older core systems means that each time a new product is introduced, new interfaces to each of the channels need to be created. In turn, new custom codes must be written and maintained. “Modern core systems support a service-oriented architecture [SOA] and some sort of framework of messages such as Interactive Financial eXchange [IFX], making interfacing to various channels much more manageable,” says Celent.
A long way to go
There are still many reasons for a bank to feel nervous about change. The complexity of the move is often cited as a reason to maintain an existing legacy system. There is also reluctance from technical staff, as Mr Peermohamed explains: “Technical staff are well versed in the existing infrastructure, so it’s natural that they should fear change.
“There’s also a need to invest in re-skilling. If changing core systems was a simple business decision it would be much cheaper, but when you consider the return on investment in terms of organisational change, that can be harder.”
The sheer newness of some initiatives is also holding banks back, as Mr Worthington explains: “In the case of updating for the Single Euro Payments Area [Sepa], there is still a lack of clarity about how payments will be dealt with in the Eurozone. Furthermore, there’s a wealth of new products making use of contactless and mobile technology, but banks want to see which initiatives will work before deciding how to make provision for them.”
Cost may also be an issue, with payback taking as long as five years. And, of course, there are risks to reputation associated with any kind of change.
With many banks now starting to consider how to move their core systems forward, what advice do experts give? “Be realistic about your expectations,” says Mr Peermohamed. “Banks are under pressure to change for competitive and regulatory reasons, but change takes time. If you throw more people at the system, it doesn’t work.
“Look at the stability of the supplier providing the software – there are risks in using them if they are not financially sound. Do they have references from other banks in your region? Make sure the technology you adopt gives you the flexibility you need. Find out about the level of functionality in the basic system – you don’t want to have to build something up from scratch.”
Often projects become unstuck when there has been a lack of understanding between bank and supplier. One approach is to engage in pre-contract studies with the client. Although this has the disadvantage of slowing down the roll-out process, it does have the advantage of ensuring both parties know where they are coming from.
Meeting needs
Change is never desirable to institutions or employees. But with the raft of regulations, combined with the increasing need to target customers with a broader portfolio of products designed to meet their needs, it seems inevitable that more banks will upgrade their core systems. Whether they take the big-bang or the piecemeal approach is largely a question of strategy.
Whichever route is taken, it is a big challenge that more banks are facing up to so as to provide services, remain responsive, and operate within the terms of legislation in an increasingly regulated and competitive world.
