May 26, 2008

It houses a bank's primary deposit and loan information systems, and helps the bank provide myriad day-to-day services. It's the core system. Without it, a bank would crumble. Given the state of most banks' core systems, however, it's a miracle that they are able to function at all, some experts say.

It may be the heart of the bank, but the core system often is held together by a complex and tenuous web of technology designed to force disparate systems to talk to one another. As the pace of change in the industry continues to accelerate, banks are beginning to realize that they might just need a heart transplant.

"I see some very large banks spending millions of dollars a year to deal with their old batch systems to help them respond to customer demands in real time," says Bart Narter, senior analyst with Celent (Boston). "When you're looking at nine figures a year in additional maintenance costs, you start to think it might be worth it to migrate to a new system. It's getting out of control."

Undertaking a core systems replacement, however, is risky business, which is largely why, with a few exceptions, the U.S. market has seen little movement in this area. Banks face the quandary of whether to take the risk of replacing their existing core systems or simply to try to hold the old ticker together by piling on the middleware layers. Yet it's that specter of risk and uncertainty that keeps many from taking the plunge.

"It's like a heart surgery," says Wayne Busch, a Chicago-based partner in Accenture's banking systems integration practice. "You won't do it until it's absolutely necessary."

However, insiders agree that banks are thinking much more seriously about replacements than they have in recent years. "Almost every bank is looking for options to enhance its environment," says Zeynep Fredrick, EVP and CIO of Waterbury, Conn.-based Webster Bank ($17.5 billion in assets). "Those still running mainframe-based systems see [that] it's costly, and they can't justify the return on investment. There's a need for more real-time solutions today."

C.G. Kum, president and CEO of First California Bank ($1.2 billion in assets) in Camarillo, Calif., says there definitely is more talk in the industry about the viability of current core systems. "Over the past couple of years, my peer banks have been evaluating their core systems, in part so they could avail themselves of better technology that's more affordable," he comments.

The benefits of the new generation of core systems, suggests Dan Drechsel, SVP and GM for financial services for the Americas with SAP (Walldorf, Germany), include improved agility and systems integration. "The new systems are based on SOA [service-oriented architecture], a common integrated platform for visibility into CRM, customer information and transaction banking systems," he says. "This combination provides a core level of agility for financial institutions to take advantage of for a long period of time. Most believe this generation of SOA-enabled, built-from-scratch architectures will be able to withstand the 30-year duration [that banks are accustomed to]."

Although the U.S. is lagging behind even other parts of the Americas in terms of core replacements, Drechsel says, he adds that he has seen more interest among banks recently in core systems replacement. "We've seen more RFPs in the last six months from U.S. banks than we have in the last five years," he relates. "They're doing serious investigative work now."

A lot of that investigative work is being driven by changing consumer behaviors and expectations, particularly in terms of real-time transactions in the payments space, according to Celent's Narter. "I'm seeing the banks look harder at their core systems mainly because of debit cards," Narter explains.

"These are real-time transactions that are irrefutable. They're not like batch ACH transactions," he continues. "You need real-time balances and real-time risk analysis because these payments are occurring in real time. The old systems were optimized for processing batch payments, such as checks. Payments and information demands will continue to go to real time and will drive a lot of the changes at banks as they move to the payments systems of the future."