In recent years, the very technology that has made banking easier, faster and more flexible for customers has become a hindrance for banks using older core systems: integration with newer applications like online banking can be difficult; the programs themselves are cumbersome and hard to manage, with countless lines of code and outdated programming languages; and updates and upgrades can be confusing and time-consuming.
Innovations like online, real-time processing, Internet banking, electronic bill payment and presentment, and check imaging are just a few of the electronic banking initiatives that businesses and consumers demand and banks must incorporate to stay competitive. Newer core systems facilitate integration of such applications and reduce the risk of system obsolescence, allowing banks to keep up-to-date and incorporate changes to suit business needs.
BARRIERS TO CONVERSION
For any bank, the decision to change core systems or third-party processors is momentous. A community bank should use the opportunity to consider whether in-house processing or outsourcing is better suited to its business requirements. The cost is roughly equal with either choice, and there are no clear trends toward either option, according to industry analyst Bob Hunt of TowerGroup. Approximately 40 percent of community banks outsource and 60 percent use in-house systems.
Financial institutions that outsource typically have a five-year agreement, with a very high (about 98 percent) renewal rate. Loyalty is not as high with in-house system vendors-because the bank has licensed and is operating the system on its own-but there still is a hesitancy to change core systems.
Typical barriers to converting to a new core system include capital, operating expense and resource constraints; training time and learning curve; and the risk of alienating customers if and when errors occur during the conversion. Most banks will not convert simply because there's a newer, better system out there. There must be an underlying institutional or operational reason.
Community banks are looking for fewer vendors, not more. While there are no hard and fast rules, larger financial institutions tend to desire best-of-breed functionality and the ability to easily integrate third-party systems, while smaller community banks ($500 million and less in assets) generally prefer a single IT provider to handle all of their needs. Overall, said Hunt, there is a very slow transition in core systems.
ADVANTAGES OF NEW SYSTEMS
Systems built in the 1970s and 1980s, prior to the availability or wide adoption of open systems and standards, were created in "closed" proprietary environments. The fundamental design of older core banking systems makes adoption of new technologies and databases, which support multiple delivery channels, including the Internet, extremely difficult and costly. There are also significant operational and security considerations that are vastly different.
Community banks may be losing out on important opportunities if they stick with antiquated systems. Newer systems are flexible, adaptable, cost-effective, and fast. They also can integrate more easily with newer, third-party applications, such as check imaging or online banking. In a typical outsource situation, the better vendors handle this integration for the bank quickly and seamlessly. Updates are easy and operations are streamlined. Community banks also may benefit by receiving all applications from a single vendor-the core provider also may offer ancillary products like branch automation, telephone banking, and online banking.
But perhaps the main reason community banks find value in upgrading a core system is that somewhat intangible tool known as customer relationship management. CRM is vital to community and mid-tier financial institutions; in many cases, this is what sets them apart from their large competitors.
When most older systems were built, data storage was expensive and so core system developers minimized what was archived. Today, data storage is cheap and management of information often is the difference between success and
failure. New systems take advantage of data mining tools and the bank's CIF (customer information file) and make information easy to access and use.
Community institutions should not overlook the value of such relational databases, which are very customer-centric. Bank personnel should be able to see the entire customer relationship when considering a transaction. From this perspective, core systems built on an open architecture and incorporating CRM tools are well worth the investment. If an institution already has decided to switch to a new core system based on operational factors, the ability to leverage CRM may be icing on the cake.
For example, St. Landry Bank &Trust, a $230 million bank based in Opelousas, La., switched to Morningside Banking System from Plano, Texas-based Aurum Technology when its previous provider put a sunset date on its existing product. CEO Robert Tomlinson says that, although the conversion was forced on the bank, it gave them the opportunity to review the new products and technology available.
In searching for a new core alternative, St. Landry focused on finding a system that leveraged the latest hardware and software technology, was easy to learn and use, and provided ultimate functionality. The system has interfaced easily to the bank's teller, platform, and payroll systems, says Tomlinson.
For Summit Bank in Arkadelphia, Ark., the priorities for a new core system were the latest technology and faster performance. Rick Coke, chief information officer for the $400 million bank, says nightly update processing runs in 12-15 minutes on the Morningside system, using less horsepower and less time than the bank's previous system. He notes also consistency among screens and functions and a livable learning curve. "It's very user-friendly software.
People with banking experience can probably get through it on their own."
In addition, because the Morningside program contains fewer lines of code and takes advantage of software "objects," which streamline functions like calculating interest, changes and modifications are simple.
This article was commissioned by Aurum Technology, a Plano, Texas-based technology company.
Most Likely Reasons Banks Choose a New Core System:
1. Obsolete hardware.
2. Software that no longer meets needs.
3. Business model changes.
4. Improved total cost of ownership