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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.

While Hancock Bank did not accept any funds from the government's Troubled Asset Relief Program, or TARP, the bank's Loper notes that its systems still must cope with increased transparency requirements. "Not taking the TARP funds keeps us from feeling the related requirements attached to them. But we still have to deal with the credit crisis impacts through changes to lending regulations to Reg Z [Truth in Lending] and RESPA [Real Estate Settlement Procedures Act]," he states. "We're focusing on those changes to get our systems in shape to handle them. When you have new regulations raining down on you, you have to make some tough decisions: Do you focus on responding to regulatory changes, which may drive some processing to niche providers?"

Time for a Change? Evaluating Core Systems Replacement

Infosys' Makhija is reluctant to paint the industry with a broad brush with regard to how banks will proceed with core upgrades. He says banks are reacting differently to the crisis and that their approaches to their cores are affected by the lifecycle stage of their systems. "The larger banks were mostly affected by the crisis, but if they are already committed to a core project, they will probably press ahead because many of their problems stem from their core systems."

A.T. Kearney's Hovenden believes there still is a business case for core systems replacement, even during this economy. When he helps banks make such decisions, he says, it's important to build a quantifiable case and include factors such as complexity, delivery constraints and the economic stability of the current core platform.

"We project this out five years," Hovenden explains. "We measure what the cost would be to implement the new product changes and regulatory changes on the legacy platform against installing a new platform, and it's a 20 to 25 percent differential in cost. When you consider what goes into maintaining the old platform, you don't really get a big difference in the total spend over five years."

As often is the case with technology strategy, size matters in the core systems debate, and smaller banks have their own options in these trying times. Kenneth Innocenzi is the VP of operations and compliance with Hamden, Conn.-based Quinnipiac Bank & Trust ($31 million in assets), which opened its doors a little more than a year ago. Although the institution started with a clean technology slate, contracting for core processing services from COCC (Hartford, Conn.) on an ASP basis, Innocenzi says it's just smart business to reassess core systems capabilities in a rapidly changing business environment. This assessment, he adds, depends on where the bank is in the life cycle of its contract and should allow sufficient time for due diligence, notification to the current provider if terminating the service and an orderly conversion to the new provider.

Innocenzi points out, however, that for an institution of Quinnipiac's size, breaking the core replacement into pieces, as many experts recommend, wouldn't make sense since everything is completely integrated within one system. "But when you do convert, make sure the data integrity is maintained so no customer or corporate data is lost in the conversion," he stresses.

MasterCard's Kelly says banks must ask themselves how much they are willing to invest and at what pace. "Core replacement is all about your business, not the technology," she says, pointing out that these tough decisions still must be made, even in this dismal market. "It's important to be alive tomorrow, but there's no point if you're not alive a year from tomorrow," she says.

Big Blue Pushes Core Transformation
While banks' core systems have served them well, legacy technology simply can't handle the evolution to a customer-centric business model, claim IBM's Chae An, VP of the vendor's software group, and David Zimmerman, global solutions executive. In this IBM-sponsored video, see why Big Blue thinks core transformation is critical in the current economic environment.

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