Core issues

Overhauling old core banking legacy systems can be complex, costly and time-consuming process for the banks. To gain an insight into the core banking landscape BM hears from two leading experts – Bob Hunt, Research Director at TowerGroup, and Rachel Hunt, Research Manager at Financial Insights.

Core banking systems are the engine room of the financial institutions across the world today. Despite this, these systems are based, more often than not, on aging and antiquated mainframe technologies that are on their last legs after years of neglect. Many of these systems were implemented back in the 1980s – an era in banking that seems almost prehistoric compared to today’s world of finance. Internet banking, 24-hour call centres and real-time ATM transactions are some of the major milestones that that have sprung up in those 20-odd years; it certainly has put a strain on the major banks, says Bob Hunt. “Their systems were developed in-house in the early 1980s, which means they have old languages, don’t have good infrastructures and are difficult to maintain.”

For years, industry insiders and the major banks themselves have been making noises about overhauling old infrastructures, but in the end nothing concrete happens. With an ‘if it ain’t broke, don’t fix it’ attitude the institutions have trudged on and put the issue on the back burner. In stark contrast, smaller institutions in emerging economies, have made huge strides in this area. Bob Hunt says this will act as a catalyst for the majors. “The pace has definitely been picking up for core replacements and if each one has a success story and shows it’s able to become more efficient and reduce the cost, it is obviously a catalyst for other banks to follow; we have started the cycle and it is going to pick up momentum over the next couple of years.”

For the financial giants, cross-border mergers and acquisitions have added to their woes in terms of core banking, says Bob Hunt. “If two banks merge across borders, which is happening more, then how do you put systems together and get some kind of economic merger if you have two system that were developed for entirely different markets?”

Rachel Hunt is confident that increasingly tight regulations will drive different channel integration. “People are much more mobile, and they're looking for much more from their service providers in terms of integrations of the different channels; we are seeing a lot of the banks doing some work around channel integration.” Presumably it is not just about front-end operations? “It's also being able to do integration on the back-end because that's what's slowing down, for example, conventional rates in online banking. It’s a lack of straight through processing.”

Easy does it
Of course, a seamless transition from the old legacy over the new is never going to happen. With millions of customers relying on the system, any impact on service can be critical. That’s why the banks choose to replace systems in segments and mitigate risk rather than adopting a big bang approach. Bob Hunt says that banks have attempted “graceful” transitions in the past but with little success. “The banks have tried to do graceful inner transitions and approaches but they’ve put the burden on their operating people, the frontline teller people to make a decision which system to use. That has proven to be ineffective because you can’t ask people to make those kind of decisions on the fly because that is where mistakes can happen.” Bob Hunt suggests that a “middleware or SOA approach” can make the system less opaque.

He is also keen to highlight the potential risk involved with any sort of system upgrade. “You can’t just put a new system in it and not adapt the way you do business. You have to have a re-engineering team working constantly asking how they can effectively work with this new system. And frankly, because of the scope of the cost, and the scope of the effort, you really have to have an independent risk management project running at the same time.”

The experts agree that planning is one of the most, if not the most, important factor in any transition like this. “The major cause of failure with core banking systems is actually not the product,” Rachel Hunt asserts. “It's actually internal issues in the bank; the main thing that banks need to focus on is the planning stage. There's a whole layer of work that needs to be done in that initial planning, to get on board, both the business side and the technology side.” She also says good communication is imperative. “Throughout the planning, selection and implementation there should be huge amounts of communication within the institution, making sure that you’ve got the users on board, that you’ve got milestones that can be achieved.”

Inside out
Some banks are have rolled out home grown solutions while others use the services of vendors to solve the problem. These vendors can provide a spectrum of solutions – from sprucing up old legacy systems to replacing the entire core banking system. Bob Hunt says that for the banks to get the most out of a vendor, the relationship is key. “You’re not just buying a system and in a couple years moving to a new one. Core banking systems are a partnership and you have to look at a core banking system as a 15-year effort. It’s really important to build a relationship with the vendor.”

From her research Rachel Hunt found that although the institutions have traditionally kept the process in-house, they are increasingly seeking ready-made solutions. “All of the banks that we're talking to said they have looked at building in-house as it’s their modus operandi until now, but there's a lot more that are actually looking at how they can plug and play some off-the-shelf applications into their systems.”

On the other hand those looking for a bespoke or tailored package there is the common pitfall of wanting to create a package unique to your needs. You assume that it is going to be efficient and deliver a healthy ROI but you end up customising the package so much so that you don’t realise the value from the solution. “A lot of the time banks say ‘we are unique’, and so we have unique requirements, and hence this package needs to be tailored,” says Rachel Hunt. But what happens in that case is they end up taking the processes that they were using at the time, and duplicating them into the new applications. A lot of the inefficiencies were probably due to the processes that were in place because you were dealing with lots of different systems, legacies and so on.”

“But you don't want to duplicate those old processes because that's the way things were always done in these systems. Then they end up facing the same problems. Then the vendor has issues in terms of updating versions because it's been customised and so on.” She stresses that deciding how processes should work before a vendor is selected can benefit the institution further down the road. “You’ve got to decide how you want those work flows and those processes to work. And then, as far as you can, leverage the fact that you're getting this off-the-shelf package. However, it's not always possible for you to completely have a ‘bank in a box’ or plug-and-play attitude because it would be too simple. But certainly, avoiding replicating old processes in the new application is key.”

For the time being the industry holds it breath when it comes to whether the old legacy core systems will finally get replaced. But with the banks’ current
siloed architecture and islands of information, making that all-important transition does look a step too soon for some. There are pros and cons for the big bang adoption versus the phased or modular approach – but whichever route you choose there is no denying that it will turn out to be a complicated and expensive task. Procrastination, however, is not really option. “Some banks which may have said ‘we can put it off for a few years’, might feel additional pressures now to get a new system in and become more cost effective,” says Bob Hunt. Watch this space.

About Rachel Hunt
Rachel Hunt is the Research Manager for Financial Insights, covering all corporate and consumer oriented financial products and their underlying technology solutions in Europe, the Middle East and Africa.

With nearly ten years in the financial services technology industry, Hunt’s experience ranges from outsourcing to core systems transformation, through to regulatory and technological issues impacting banks today. Prior to joining Financial Insights, Hunt was for a number of years global research manager for TEMENOS, a core systems vendor.

About Bob Hunt
Bob Hunt is a research director specialising in core banking and transaction processing systems for TowerGroup. His research is published within TowerGroup's Retail Banking practice.

Before joining TowerGroup, Bob held senior management positions as director of technology banking for BankBoston, managing director of BayBank Systems, Inc., and senior vice president at the Irving Trust Company. His responsibilities included systems development and operational responsibility for item processing, retail and wholesale banking, electronic commerce, ATM networks, and capital markets.