Core Systems Banks' legacy core processing systems tend to be Inflexible and expensive to maintain. To improve customer service, product development, regulatory compliance and fraud prevention, banks must transform their core systems to enable more agile business processes.
Jorg Fischer, CFO, Retail Banking, Standard Bank (Johannesburg, South Africa)
Rusty Wiley, Global Banking Industry Lead, IBM (Armonk, N.Y.)
Daniel Mayo, Lead Analyst, Financial Services Technology, Datamonitor (New York)
Mark Melillo, VP of Banking, Brokerage & Leasing Sales, SAP (Newtown Square, Pa.)
Q. How can banks maximize the performance of their legacy core processing systems?
Daniel Mayo, Datamonitor: For top-tier institutions, project risk and cost mean full core systems replacement is not a realistic option. However, banks can achieve renewal by reengineering their systems first. Banks can wrap their legacy systems with new technology, which can expose functionality as a service to other systems and allow changes to the core without the need to redevelop all links to external systems. Then systems can be modularized and replaced/redeveloped on a piecemeal basis - reducing project risk and cost and allowing institutions to achieve quick wins in pain-point areas to finance full reengineering.
Mark Melillo, SAP: Most banks have antiquated legacy core systems that require a significant portion of IT budgets to maintain. While Web services and enterprise integration architectures are helping institutions augment lagging functionality, these new technologies are not enough. The marriage of infrastructure and content-rich, business process-driven applications is the best solution for banks today. This type of solution not only maximizes the value of existing systems, it also establishes a foundation for a successful migration road map, enabling the replacement of costly core legacy applications with lower cost and flexible business enablement.
Q. How do banks' legacy core systems hinder the business?
Mayo, Datamonitor: Most top-tier banks run systems that are very efficient product-transaction processing engines. But these systems fall short in meeting today's requirements around business intelligence (for compliance, sales and management insight, for example), the need for real-time processing (e.g., to manage fraud and improve customer service), flexibility to maximize the efficiency of bank operations and multiplication of banking channels.
Jorg Fischer, Standard Bank: Banks' core systems today are vertically integrated - we call them system "smoke stacks" - and they only fulfill a certain function for which they were originally acquired. To integrate them into future systems becomes exceptionally complicated. If you've acquired or merged other banks or other areas for your bank, it becomes very difficult to integrate them. You will run into problems if you want to make changes. For instance, if you want to do new product development, you will have to hard-code even just simple product or fee changes, which can be very time-consuming. The vertical core systems also affect a bank's customer service because they do not offer a consistent look and feel to the customer. The look and feel will be totally different for all of the products, because all are from totally different systems. Core systems today must be more flexible.
Melillo, SAP: Core banking systems were designed and developed before the advent of 24-7, consumer-driven banking; the Internet; data warehousing; the PATRIOT Act; Sarbanes-Oxley; Check 21 and so forth. Every time banks needed to adapt to these market and business demands, new application silos were created and core systems were "patched." The resulting environments are expensive to maintain and hinder agility and adaptability, causing unnecessary complexity in regulatory compliance, customer service, timely product development, M&A value and competitive advantages.
Rusty Wiley, IBM: Banks need to improve the customer experience and get new products to market more quickly, though their existing systems are unable to support these initiatives. Today's core systems are unable to deliver consistent customer services across all channels because they cannot support complex, interdependent products and relationships; they do not effectively integrate customer views; and they are ineffective in providing multidimensional management information. Legacy core systems also are inflexible due to reliance on old applications and programming models, which require lengthy development periods to introduce and support new products. What's more, older systems cannot offer visibility into all transactions across the bank and are unable to perform advanced analytics necessary to satisfy regulatory compliance and mitigate fraud.
Q. What are the best strategies for core systems transformation?
Mayo, Datamonitor: The key success factors for core systems renewal are around project management and executive sponsorship, rather than the technology approach itself. For most institutions, the big-bang approach will not be feasible, and a phased approach through reengineering the architecture allows development over time and enables banks to obtain a series of benefits in the short term.
Fischer, Standard Bank: When you upgrade, you're just building layer upon layer of middleware and not really solving the real problem. If you're one of the top 10 banks in the world, you might have a business case to build yourself; but it makes no sense for a second-tier bank to build itself - it's much better to buy a software package. Mitigate the risk of implementing a software package by selecting the right vendor. Consider which IT software vendors will be here in five to 10 years' time. See how the company's culture fits within your organization and how you can build up trust. Then determine which software application you want. Consider what your future IT architecture looks like, what kind of development expenditure the vendor is putting into the banking industry and the maturity of the product itself. There's nothing wrong with buying or codeveloping leading-edge software, but you've got to be comfortable with the company. If it's your first implementation, you might want to go with something that's a bit more mature and proven in the marketplace with five or 10 different banks.
Melillo, SAP: The best approach is an incremental transformation strategy that allows banks to realize immediate operational benefits with an enterprise-ready solution for their core banking needs. An incremental approach removes some of the perceived risks associated with core system replacement and allows the bank to leverage prior IT investments as much as possible. Solutions designed with both infrastructure and content-rich, process-driven applications enable the integration necessary to make this approach successful as well as the reliability necessary for mission-critical core banking functions.
Wiley, IBM: Core systems transformation is not about a package implementation or internal development - both will work when used appropriately. It is about transforming and building the right components at the right time to maximize investment.
Q. How does branch system performance impact core system transformation strategies?
Mayo, Datamonitor: As legacy core systems were designed for process transactions, branch systems were initially designed to capture transactions. With the branch evolving to a sales office/retail location, branch systems need to be able to maximize staff productivity across the sales, customer servicing and transaction-capture processes. For most banks, this has required the creation of new systems outside the core (e.g., operational customer data, workforce optimization systems, etc.), which creates challenges in managing multiple data systems/multiple processes. Core renewal should focus more on processes rather than transactions and be customer orientated, which will enhance branch performance.
Melillo, SAP: Branch systems, like all delivery channels, play a critical role in the foundation of a bank. Often, banks are tempted to put enterprise business process logic in delivery channels, due to the inflexibility of enterprise core applications. The result is different customer experiences at various channels, decreased reusability, break points in enterprise workflow and increased training and maintenance costs. A key strategy to maximize new and existing system investments is to focus on an enterprise services architecture that can be delivered through all delivery channels and coexist in today's environment. This approach will improve organizational synergies, enterprise workflow and overall customer service.