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Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies

A global banking survey by PwC highlighted a number of challenges for banks in pursuing a digital strategy.

Legacy core banking systems are the biggest barrier to banks implementing a digital channel strategy in the near future, PwC’s CIO Global Banking Survey, which was released earlier this year, found.

The challenge of aging and complex core systems was cited as the most severe issue preventing banks from pursuing a digital strategy both by overseas and domestic banks, according to the survey of 157 banks in Europe, North America and Asia. The regulatory environment was the second biggest barrier most often cited by the U.S. banks in the study.

“Banks are facing a lot of barriers around their legacy environments that is definitely leading to a desire for new cores,” Julien Courbe, the financial sector technology lead partner at PwC, said. “There are technology challenges that you simply cannot circumvent without integration between the core and the online and mobile channels.”

Courbe added that he expects to see a rise in the number of core transformation projects soon as a result of the challenges that legacy core systems are creating for banks.

[See Related: Core Systems Modernization: Risk and Reward]

Among the institutions surveyed, exactly half said they have a digital strategy that aligns with the business strategy of their bank. Another 30% said they have a digital strategy but it doesn’t align with their business goals, and 20% of them said they are still developing a digital strategy.

The major factors preventing alignment between business and IT strategy among the banks surveyed were organizational silos and lack of communication between different parts of the organizations, according to Courbe. “In some cases there was also not enough interest from the board and executive leaders [in the bank’s digital strategy],” he added.

At least half of the banks in the study expect their bank will increase its investment in digital channels (57%), analytics (51%) and IT (50%) over the next two years.

Almost a third (32%) of the respondents said that revenue growth per customer is the top metric they use to measure their return on investment in digital channels. Customer satisfaction scores (21%) and service costs (20%) were the second and third most popular metrics.

And banks are expecting to see revenue growth as a result of their digital channel investments in the near future. Almost two thirds (63%) of those surveyed said they expect to see they expect to see revenue growth of at least 6% over the next two years within the digital channels market.

Those expectations on revenue growth are realistic, Courbe said, as long as banks follow through on their digital strategy and make the necessary investments. “Everybody catches up to the new technologies at some point, but it’s about how quickly can you execute,” he noted.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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KBurger
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KBurger,
User Rank: Author
11/26/2013 | 6:32:53 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
That's a good point -- it's been a long time since most FIs' systems were monolithic, all one flavor & a single vendor. Thanks to open standards and interoperability, most companies have a mix of old, new, good, not-so-good, in-house, vendor, etc. Legacy has become a catch-all phrase for anything that is not new. The issue isn't the age or provenance of the system/s, its: can your company do what it needs to do to drive growth, manage its finances, meet compliance requirements & provide good service. If not, you may have a systems problem.If so, it may not matter what your mix of systems involves.
keitha0000
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keitha0000,
User Rank: Apprentice
11/26/2013 | 2:12:29 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
I'd also like to point out that in many cases, new development takes place on these "legacy" systems - legacy systems that include new, powerful and efficient applications running on the fastest, highest-capacity hardware platforms (that also have the best TCO). Calling these systems "legacy" I think is unfair or even misleading. Now certainly there are systems out there that are truly legacy, and these systems could benefit from a core systems rip-and-replace OR an overhaul of the existing systems, however, to group all mainframe systems under the "legacy" umbrella is an over simplification at best.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/25/2013 | 9:37:40 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
I wonder to what extent banks here are paying attention to other geographies particularly Asia where most banks have done core transformations in the last few years. What have those projects enabled for those institutions? A lot of U.S. banks that are undergoing replacements are owned by foreign companies/banks. Will those banks here see the same benefits that banks elsewhere are getting from new core systems? If so, it might get the market moving.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/25/2013 | 8:58:59 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
We also hear a lot about the banks that are doing core replacements using phased approaches and agile methodologies that help limit the risk of that "open heart surgery." So yes such an "operation" will always be inherently risky, but there are also ways to mitigate that risk during the operation.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/25/2013 | 8:57:26 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
It's easier to go the route that you're talking about in building around the current core system. I think if some of the few banks that have done core transformations in the last few years start showing that they have gained a competitive advantage as a result of those projects, then more banks will be interested in replacing.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/25/2013 | 8:45:34 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
There are definitely ways to build around the legacy systems but I think banks are wondering if it would be easier to go with the replacement route instead of continuing to build around them. A lot of banks are trying to simplify their IT environment and core replacement holds some promise there. Building around the aging systems has its own advantages compared to replacing the core, but that promise of a more simplified IT environment might outweigh those benefits for some.
KBurger
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KBurger,
User Rank: Author
11/25/2013 | 7:42:18 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
This might be a bit of semantics, but the problem is not necessarily with the mainframe (or any piece of hardware) itself. It's about the systems that run on the platform. The performance & capabilities of the hardware may have been upgraded and finetuned but if the core banking (or policy admin, or billing) system hasn't been modernized, that definitely is going to hold back the institution. To Greg's and your points, maybe that's why mainframes still have appeal for processes that involve crunching huge amounts of data/numbers, since that often involves analytics and data management systems that are modern and continually being updated. But maybe not so much in the core systems space?
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
11/25/2013 | 11:12:03 AM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
Thank you for your insight. Yes, it is true that there has been a (small) revival in the mainframe in the past couple of years. After all, if you are looking for the cheapest MIPS capability, look no further than a mainframe.
Lpolastre
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Lpolastre,
User Rank: Apprentice
11/24/2013 | 3:51:56 AM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
First, let me put this clear and out of the way: I work for Big Iron, but I'm only a technician (so I'm not doing PR, and any/all opinions here are mine alone and not necessarily shared by my employer). That being said, let me get to the matter:

I find this "trend" of saying that legacy/core systems are a hinder for banks (or any other industry) to implement a new technology/solution/technological approach a great amount of wind - nothing of real weight, but it seems to get some people to move, not necessarily in the right direction.

Current technologies developed for the mainframe have moved it well into the 21th century. If you talk about cloud, big data, social networks and all the new hype in technology, you're talking mostly about how data is used, and except for the terminal used by the users, they don't care or worry about the machines involved. So, for the back-end servers, as long as they work fast and correctly, the information can reside in a single server, in a private cloud, in a mainframe, or in a mix of them all. TCP/IP is used to connect everything nowadays.

The main reasons why so many people talk about getting out of the mainframe is not really because of the technology, but because of the visible costs traditionally associated with the mainframe and the reduced number of people that have a background on this technology. Still, when put together, the costs of modernizing the legacy infrastructure to enable the new technologies may be far less than trying to move out of the legacy systems just to implement these technologies. Aside from modernizing the mainframe itself and its traditional components, IBM has invested in adding new capabilities to keep up with the technological demands.

The largest banks in Brazil rely on mainframe technology to handle the workload of everyday's business, and they are also investing in these new technologies as a way to attract new customers and keep the current ones. All of that without experiencing unplanned downtime or unavailability. Unless I'm mistaken, the banking industry in Brazil is one of the strongest when it comes to investing in technology.

And just a final piece of information: IMS, one of IBM's transaction processing systems, has completed 45 years of existence this year. The new version 13 has surpassed the mark of 100k transactions per second for a single IMS region, something that I doubt that we'll be seeing so quickly in any platform outside of the mainframe.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
11/23/2013 | 7:09:57 PM
re: Legacy Core Systems: The Biggest Obstacle for Bank Digital Strategies
Certainly, a core replacement project is no easy task -- that's why it takes a major commitment from the entire organization to even begin to tackle a core replacement. And the heart surgery analogy is pretty accurate. However, eventually most older systems will need to be replaced or heavily modified. Delaying a replacement now is just delaying the inevitable. It's not necessarily a bad thing to put off a big core project, since that might make sense for the business right now. But eventually, someone will make the decision to go under the knife.
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