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Banks -- and Their Core Systems -- in Survival Mode

Amid an economic downturn that is only beginning to show signs of a bottom, banks are reexamining their core systems, with a priority on phasing in capabilities to cope with new realities around risk, regulation and customer retention.

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Just when you thought it was safe to embark on a core systems replacement, along came the worst economic downturn in a generation.

Less than a year ago BS&T reported that 2009 would finally be the year the industry would see movement in the U.S. behind core systems replacements. Then some of the premier financial institutions in the world went belly-up, the credit markets froze and the banking industry imploded.

TowerGroup's Bob Hunt, senior research director with the Needham, Mass.-based firm, cites at least two top U.S. banks whose plans to pursue core replacements this year have been detoured. "One was taken over, and the other is in crisis mode right now," he explains.

Stuck between the need to upgrade core systems in order to cope with a hyper-regulated, risk-averse environment and the reality of a severe recession, with few exceptions banks are looking to extend the capabilities of their legacy core systems.

"Banks are retrenching, and spending is tight now. There is tighter prioritization of what banks will spend on," acknowledges Shane Loper, COO of Gulfport, Miss.-based Hancock Bank ($7.2 billion in assets) and a BS&T 2008 Elite 8 Award winner, suggesting that complete core replacements aren't in the budget.

A data integration services executive at a large bank, who spoke on the condition of anonymity, confirms that banks are altering their spending plans around their cores. "Most know they have to do something to fix their cores," she says. "But now you have to look at how well you can manage risk and how fast. It comes back to the technology -- plans are being scaled back to first deal with the crisis, and banks are doing things on an as-needed basis."

And right now what is needed is stronger risk management, greater transparency and more-aggressive customer retention. As a result, banks are upgrading their core capabilities in these areas while making do with legacy functionality elsewhere.

Phasing In Core Functionality

According to Mike Barba, a manager with Devon, Pa.-based SMART Consulting, banks must approach core transformation cautiously, particularly in this business environment. He advises institutions to take a phased approach to refreshing their core systems, starting with one component, such as a risk management module, rather than attempting a complete rip and replace.

"Step back and look to accomplish a specific goal," Barba says. "The challenge for executives is being in crisis mode and surviving versus planning for the future. When you take a shortsighted approach, history tends to repeat itself."

Joan Kelly, group executive with Purchase, N.Y.-based MasterCard's global technology organization, oversaw the replacement of the credit giant's core payments systems over the course of four years starting in 1999. Noting that the only area of the conversion that required a "big bang" approach was the clearing system, she suggests that introducing new core functionality in stages reduced a lot of the implementation's risk.

"We had a phased-release strategy where we would release various aspects of the applications twice a year," Kelly recalls. But she stresses the importance of governance to project success. "Monitoring your delivery is important to break this down into executable pieces," she says.

Patti Reynolds, senior managing consultant with MasterCard Advisors, the professional services arm of MasterCard Worldwide, says she tells her bank clients that core replacement is no longer an all-or-nothing project. "When you talk about the infrastructure supporting core card systems, it is either viewed as an enabler or an inhibitor to the bank's growth and efficiency," she comments. "We're telling clients to look for places where they can decouple their systems and find alternative solutions that can be integrated with the core, so I think you'll be seeing a lot of work-arounds."

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