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Core Systems Replacement Becoming a Competitive Imperative

The need to meet consumers' real-time service demands, and to adapt quickly as those expectations change, is driving many banks to replace their aging legacy systems with modern, flexible cores.

In addition, after nearly 12 months in operation, the institution discovered that only 11 percent of consumers who began deposit applications online were completing them. By September 2009, Nationwide had rewritten the origination component of the application and saw its throughput numbers jump to more than 54 percent.

"The nice thing about [a modern core system] is that it is real-time and it's more flexible than its mainframe competitors. We're able to come up with more ideas and to tweak things. You have to take the time and you have to pay to build them, but you have the flexibility to do that," Plescia comments.

Three for All

That same agility was a driving factor behind Richmond Mutual Bancorporation's (Richmond, Ind.; $881 million in assets) decision in fall 2008 to implement the Metavante (acquired by FIS in April 2009) IBS core banking solution in each of its three subsidiaries -- First Bank Richmond, AmericanTrust Federal Savings Bank and Mutual Federal Savings Bank. First Bank Richmond, the holding company's lead bank, was the last to go live on the new platform, in October 2009.

According to First Bank Richmond SVP of operations and COO John Rusie, each of the three banks were previously using outsourced core systems that were near the end of their contracts. The company looked at the situation as an opportunity to standardize.

With an assist from Scottsdale, Ariz.-based Cornerstone Advisors, "We gave some consideration to each of the existing core systems that each bank had," Rusie recalls. "In our analysis, we felt that none of them would really carry us into the future the way we needed to."

That future includes -- surprise -- enhanced online capabilities. All three banks currently offer online banking, but customer expectations, coupled with competitive pressures, are driving the banks' efforts to expand their online offerings, Rusie acknowledges.

First Bank Richmond's business model has evolved to serve more commercial small business needs, but those online services were difficult to launch on the old core, Rusie says. "We would have customers ask for something that we couldn't just implement right away. Some of that was in cash management capabilities -- the ability to have several different accounts and have funds flow back and forth between an account and a line of credit," he relates. "Under the new system we have the capability to add those types of functionality without it being a manual process behind the scenes for [IT]."

In addition to expanding online banking capabilities -- including security improvements and online bill pay reporting features for commercial clients -- Richmond Mutual also leveraged its modern core system to standardize its own infrastructure. "It has given us the ability to take advantage of the holding company -- to provide services at the holding company level that we probably weren't able to do before, especially behind the scenes from an accounting standpoint," Rusie explains.

Patience Is a Virtue

But there is an adjustment period required before customers appreciate the enhancements that are enabled by the new core, Rusie notes. "Early on, you get some pushback from customers that don't like change. That's not a negative to the system -- you're going to get that regardless," he says.

Nationwide Bank's Plescia estimates, based on his own experience as well as conversations with peers and competitors, that there is usually a nine- to 15-month adjustment period for the company to work out any kinks and for customers to appreciate the enhancements a new system can deliver.

In particular, Nationwide experienced some difficulty converting its existing credit union business onto the new platform, Plescia reveals. "It was bumpy at first, ... especially the conversion of the credit union onto the banking platform. [There were] a lot of the things that we could have tested for a million years and never thought of," he relates. "It took about nine months to shake that out. Once we got it smoothed out, it's been running really solid."

SMART's Tattersall stresses that deploying a new core system is difficult and fraught with risk. "It's a nightmare because you're replacing something that, almost inevitably, is built on a really old architecture with something that is relatively new. There's still enormous resistance to the level of change that it requires and the complexity of the management to do it," he explains.

"On the other hand, there is an increasing need to do it," Tattersall adds. "If you compare the situation three or four years ago with now, there are probably more banks doing it now than there were then. I suspect the number over the next two years will increase further."

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