Technology is often seen as vital to resolving the challenges faced by banks, be it designing innovative products or meeting regulatory diktats. But banks are equally aware that without a strong core engine, peripheral technologies cannot produce results.
For instance, a bank’s efforts to give customers a single view of their financial information can be thwarted by disparate core systems built on obsolete technologies unable to talk to each other. As most banks, especially in developed economies, are using core banking systems designed in the 1960s and 1970s, it is not surprising modernisation is a priority.
“Legacy banking systems lack the inherent flexibility to meet today’s challenges. They are costly to maintain, increasingly incompatible with new business requirements, and do not provide a foundation for growth,” says Ian Porter, core banking business development manager at Hewlett Packard.
Banking history of the 1980s and 1990s is scarred with costly failed attempts by leading banks such as Citigroup to overhaul their systems.
What is different now, however, is the availability of sophisticated packaged core banking solutions that meet stringent requirements in terms of robustness, scalability and rich functionality.
Core banking vendors such as Infosys, Temenos, i-flex solutions and SAP offer open architecture products featuring, among other things, quick time-to-market functions, real-time capability and customer-centricity, as well as reduced total cost of ownership (TCO).
Banks have reported gains: Jaihoa Sir, CIO and executive vice president at Industrial Bank of Korea (IBK), which worked with IBM to replace its legacy core system with Temenos’ system about a year ago, says it has reduced costs, brought revenue growth, and increased productivity.
It cut the product development cycle from more than 60 days to less than two. This enabled the bank to launch 168 products in six months, generating revenues of more than $120m.
Packaged solutions have had most impact in emerging markets, where automation is basic, or in mid-sized banks in developed markets. The big banks have been relatively quiet – apart from HSBC, which said last year it would work with Temenos and IBM to replace its 20-year-old core system, and DBS Bank of Singapore, which has opted for Infosys’ system. Some other top-tier banks such as Citigroup, ING and ABN Amro, adopted replacements a few years back, but only for their international operations, leaving their core home market infrastructures untouched.
Banks are reluctant to replace ageing core systems, their transactional processing backbones, because it is extremely risky. “Top-tier banks have zillions of man-hours invested in their core systems which includes a lot of customisation. The thought of unwinding it all is scary. Any error in the system can bring the bank’s entire technology infrastructure to a grinding halt,” explains Bart Narter, senior analyst at research firm, Celent.
Andreas Andreades, CEO of Temenos, adds that there are no quick returns for a core replacement project. From the time the decision-making process starts to the time cash flows in, the replacement project can take between five and seven years at a top-tier bank.
Even mid-sized banks are reluctant to upset the status quo. “The cost of replacement is extremely high. For large banks it ranges between $50m-$100m and, all said and done, legacy systems are rather robust. They might be very antiquated and run on Cobol, but they run efficiently with an uptime of over 99.9 per cent,” states Peter Nikonovich, banking consultant at Bearing Point.
Where legacy systems struggle, he says, is in rolling out new products efficiently and quickly. Therefore, rather than replacement, Nikonovich says some banks are “refreshing” legacy systems, with tools such as service oriented architecture (SOA), that can isolate product and pricing from core applications.
But many see this as only a stop-gap solution. Senthil Kumar, European CEO of i-flex solutions, for example, sees “progressive replacement” as a better strategy. This combines the “big bang” and “refresh” models, with banks replacing a few ancillary systems such as the customer information file, loan or the cash and payments module while continuing with the key components of the core banking system, such as the demand deposit account where migration would be much more complex.
This is becoming popular. For example, Nordic technology vendor, Tietoenator, in the past six months has signed deals for its corporate cash management module with Nordea, Handelsbanken and Rabobank.
Ståle Grønningsæter, head of banking solutions at Tietoenator, says: “Most banks opt for building a services layer around the remaining legacy systems which helps extend the life of these systems. However, everyone understands that such steps can stretch the life of the ageing systems only for some time. Eventually, legacy has to be replaced.”