New banking requirements and customer demands are challenging traditional banking practices. This environment has put added strain on the antiquated core systems found in many large banks around the globe. Most of these systems have been in place since the 1960s and 1970s, built in-house using technology current at that time. As a result, they are costly to maintain, inflexible and operate in closed environments, making communication with other systems and completion of simple transactions a difficult task. Given these factors, coupled with bottom-line pressures, a growing number of banks are considering replacing existing core systems with next-generation vendor solutions. This shift to vendor solutions not only represents a significant move from the more traditional homegrown solutions, but also promises greater speed to market, lower cost, advanced functionalities and higher success rates.
The urgency for core system replacement differs by bank, with many continuing to deny the need for new systems, fearing the costs and risks associated with them. Replacement projects will therefore be slow to take off with only a handful of the largest global banks with projects now in place. Regional trends will also be a factor. Celent forecasts that European, North American, Asia Pacific and Latin American banks will each spend $24 billion, $19.6 billion, $13.6 billion and $2.67 billion respectively on core systems by 2005.
This next section compares some of the regional trends for core system replacement.
EUROPE European banks have been the most aggressive system replacers and are expected to spend more on core banking systems than any other region over the next few years. Their aggressiveness is due in part to their decision-making structure, whereby members of IT rather than business strategists (as in other parts of the world) make IT decisions. These individuals are likely to place greater weight on deploying cutting-edge technologies and better understand the cost and necessary productivity benefits of such technologies. More importantly, however, the creation of the European Union and the euro have put this region-s banks at a higher level of urgency given the challenges associated with making changes to inflexible systems.
NORTH AMERICA Core replacement remains a moderate priority for many U.S. and Canadian banks, but is expected to become a high priority as new efficiencies become harder to identify. North American bank customers demand high levels of customer service, making antiquated transaction-based systems misaligned with current customer-centric strategies. Transaction-based systems make it difficult to extract customer data to help banks better identify cross-selling opportunities and serve their customers. Reluctance exists in the region to replace existing mainframe systems because of the large costs associated with such initiatives. That said, the consolidation that took place, especially in the United States, during the 1990s left many banks to deal with the inefficiency of having multiple systems running simultaneously. As banks are forced to cut costs, a large number will look to core replacement as a way to consolidate systems onto a single platform and eliminate multiple license fees and process redundancies. To date, only a handful of the largest North American banks have begun replacement projects, including Citibank, Bank of America and Scotiabank.