Core Competencies in Banking

With HP’s head of Core Banking in the EMEA region, Patrick Weber.

BM. As the Middle Eastern economy booms, many banks are looking at plans to build out business quickly and expand branch networks further throughout the region. What challenges does this rapid expansion present in terms of core banking systems?
PW. One of the biggest challenges facing banks is ensuring that the infrastructure is adaptive enough to accommodate the rapid growth in the area and marketplace. The core banking system (CBS) must also be flexible enough to ensure quicker time to market for new products and simultaneously be scalable to handle the growth. Furthermore banks must adapt their systems from a risk perspective. Islamic banks share their risk with investors and borrowers, which is fundamentally different to conventional banks. Banks in the Middle East must manage risks common to conventional banks (e.g. liquidity, credit, market and operational risk) as well as risks unique to Islamic banks (e.g. reputation risk for non-compliance to Sharia principles or ownership risk with assets owned as a part of financing)

BM. And what solutions does HP offer to help overcome some of these issues?
PW. HP has developed a banking architecture framework called HP Adaptive Bank, to enable banks to deliver world-class cost structures, focused innovation and rapid response to regulatory requirements. The strategy combines architecture, solutions, technology and services to enable the collaborative business model of the future, with the greatest business agility and efficiency. HP Adaptive Bank is built on a strategy of inclusion. Banks can choose the best implementation for their business objectives from a range of industry standards (e.g. .NET and J2EE), operating systems (Windows, UNIX, Linux, NonStop and others) and existing in-house applications or new applications from a range of partners.

HP Adaptive Bank is a set of pre-designed, pre-developed and pre-configured objects that can be adapted to the bank ’s needs. HP Adaptive Bank Framework is one of a few architecture frameworks that meet the business requirements of a true multi-channel solution, enabling integration of many diverse channel solutions into a single interoperable processing and management architecture. It encompasses many channel applications of varying standards and architectures, yet provides uniform back and front-office integration and a single point of service.

BM. What benefits can a state-of-the-art core banking system bring – particularly in terms of putting the customer at the centre of a bank’s business?
PW. A state-of-the-art core banking system is vital to support the business to sustain the competitive edge and to deliver the bank ’s strategy to the customer. With a modern CBS, banks will be able to meet the growing customer demands and to provide, with a very short time-to-market, a wide variety of personalised customer -centric products across all channels used by the respective customer. There will, therefore, be a significant improvement in service quality, including better client segmentation. Banks will, possibly for the first time, have a unified view of the customer across all channels and products. A modern CBS will enable banks to better manage the customer relationship and will support the creation of a customer experience differentiation.

However, banks must be aware that a modern CBS alone will not make the bank client-centric. The organisation must change to move from a product/account -driven organisation to a client-driven

organisation; from a transactional relationship to an advisory relationship. Client-centric implies cross-organisational thinking and teaming and a modern CBS can support this by providing a unified view of the client.

BM. Some banks continue to baulk at the prospect of major replacement projects. Is there an alternative to costly rip-and-replace infrastructure overhauls?
PW. An alternative to rip-and-replace is to use the HP Adaptive Bank framework to first bring in ‘look and feel ’ in all touch points , which reduces the training requirements for the next step: componentised replacement using the HP Adaptive Bank SOA framework. This is risk mitigation, especially if the legacy system is old and well entrenched. Simultaneously , the Adaptive Bank SOA approach to the dilemma of obsolete technology in the antiquated CBS is to evolve the traditional core banking model from a complex framework that limits options and incurs high costs to a revolutionary new SOA. HP Adaptive Bank SOA is a highly efficient and cost-effective way to integrate heterogeneous IT systems and help banks increase business agility.

HP assists banks through the entire SOA process, from envisioning and assessment to development and governance. HP’s Adaptive Bank uses SOA principles to integrate multiple channels and legacy systems, so that they may be phased out easily and with minimum disruption and expense.

BM. Demand for Islamic banking has grown exponentially over the last decade. Does this offer any unique challenges for banks in terms of their core banking solutions? And how should banks operating in the region – and indeed in other parts of the world where Islamic finance is proving popular – approach a core system upgrade that caters to the needs of Sharia-compliant banking?
PW. Banks must find a way of merging Islamic and traditional banking requirements in a manner that technically and commercially reflects Sharia compliancy to mitigate or avoid reputational risk. Some banks end up maintaining two CBS, one traditional and one for Islamic banking. Having Islamic banking products in the CBS is only one part of the solution. The bank must also structure itself accordingly – both the product as well as the complete process must be Sharia-compliant, including touch points with third-parties suppliers.

However, banks must beware : simply automating the processes as they are now will not deliver the expected result. A new CBS must touch the processes across the bank and break down ‘sacred ’ processes, to ensure gains in operational efficiency and STP.

Regardless of their operational requirements, decision-makers need to achieve their core renewal goals quickly. SOA has emerged as a crucial implementation trend that many consider, helping bridge the gap between their existing systems and their future goals. Many banks want to access the agility delivered by vendor solutions. To help them do this, they must enlist the right combination of partners to steer them through their implementation and transition process.

BM. In general, what are the pressures facing today’s banks ? What is driving demand for CBS renewal?
PW. The main drivers are increasing customer demands and the need for banks to be able to innovate quickly and responsively and to reduce TCO while remaining compliant with ever-changing regulations. Banks must be able to meet the customer’s regularly changing demands for more channels, real-time information and transactions, integrated banking, etc. Banks must deliver what the clients want now and also anticipate the clients’ future needs.

Banks need to be innovative. Time-to-market for new products must be very short. This can work with legacy systems, but it is extremely expensive to stretch legacy technology to meet current demands. Many banks support their operations with up to 100 legacy systems. These have been built up over decades and are costly and difficult to support and modify. Banks need to consolidate systems to simplify the overall operational landscape.

Regulatory pressure is mentioned purely for the sake of completeness. The green factor pressure is also growing. Governments, regulatory bodies and clients are putting pressure on organisations to take corporate responsibility seriously. Green strategies around server usage, power consumption and cooling do more than just benefit the environment. They also greatly improve performance and reduce consumption costs. Banks are keen to reap these cost benefits and reduce their running expenses. So, as well as changing their CBS to achieve more agile processes, banks are working to address their overall infrastructure with a view to reducing costs.

Why upgrade?
Because of their inflexibility and expensive maintenance – coupled with technology advances that can now deliver vastly increased power, scalability and reliability in open systems – mainframe computers are no longer the de facto industry standard to support core banking applications.

• Moving your applications from mainframes to open-standard-based servers means flexibility and modularity that result in lower TCO and greater choice
• Based on your objectives, HP and its best-of-breed partners deliver integrated, end-to-end systems that reduce the need for in-house development
• Integrated modularity offers your bank optimal functionality for new product launches
• HP will help your traditional banking model evolve from costly complexity limited options to a revolutionary new service-oriented architecture (SOA)

Patrick Weber leads the Core Banking and Payments practice in EMEA for HP. He has over 15 years of experience in the financial services industry, he was CIO for a financial institution in Germany and Luxembourg, and has extensive experience in managing projects for core banking system replacement.