Core transformation – evolution, revolution, or die?

By Adam Burns, Editor-in-Chief

Nearly one quarter of all banks are considering replacement of core systems within the next three years according to a recent Financial Insights, an IDC company study. The question is how (rip and replace, or gradual growth?) and not why. You’re either re-architecting or it’s too late.

“Just because the app was put in doesn’t mean the app is to blame”
-Dave DeCamp, CA

Core banking systems are key to banks flourishing in this intensely competitive banking landscape – come rain or (eventually!) shine.

They can facilitate high growth business initiatives, providing agility and flexibility for tapping new opportunities, meet compliance and regulatory requirements and bring about operational and process efficiencies. The problem is that most don’t.

“When we talk about core banking systems, we are referring to those back-end systems that do the day-to-day transaction processing, statement generation and reporting for the bank,” says Bart Narter, a senior analyst at Celent.

“These systems tend to be written in COBOL, perhaps with a bit of assembler thrown in to optimize batch runs. They run in batch mode, so that transactions are posted nightly. They have been running at the bank for 20 or 30 years – yet the fact that they have been running for so many years is both a blessing and a curse. The blessing is that they are scalable, reliable, stable systems, with some rare exceptions. Whatever else people might say about their core systems, they do the job day in and day out. The curse is that they are saddled with old technology that make the systems very inflexible, hard to communicate with and difficult to maintain.”

How important is good core banking technology? Santander’s José María Fuster was named CIO of the Year 2007 by The Banker. The year before, it had awarded Santander the Core Banking Systems Innovation award for its new core banking system. Coincidence? Fuster doesn’t think so.

Though the group’s roots are in Spain, it has a strong presence across the world (it is Europe’s largest bank). This has been built through a number of acquisitions in the last few years, including Sovereign Bancorp in the US and Abbey in the UK. “Business and geographical diversification is an opportunity to improve our technology with functionalities from different markets,” Fuster states. “It has helped our core banking system to become one of the most technically and functionally advanced in the industry.”

Fuster claims that technology is never a constraint in the decision making process. “On the contrary, we were very confident [during the Abbey acquisition] that our core banking system would accelerate Abbey’s integration in the group,” he says. “At the same time, it generated synergies by transferring our deep expertise in commercializing financial products and services. In essence, our core system allows us to export our way of doing banking.”

Why change now?
Jeanne Capachin is lead analyst on core systems transformation for Financial Insights, an IDC company. According to a recent Financial Insights study, nearly one quarter of all banks are considering replacement of core systems within the next three years. This is not a decisions to be taken lightly – the cost of transformation is high, as are the risks – especially in light of current economic conditions. So if core banking systems are what keeps the lights on, and the lights are on, why change things now?

“Certainly the core bank systems that we have today are very efficient if we look strictly at transaction processing,” says Capachin. “But, as soon as we try to change those systems or get at the data that’s stored in the monolithic code, that’s when we start to run into problems. This isn’t the core system that’s going to form the basis of the bank in the future.

“It’s hard to serve your customers with the core banking systems that we have now. It’s also very difficult to make changes to those systems, to introduce new products. So, the core systems that we have often hamstring the operations of the bank and the business of the bank. 

“By investing in new core banking technology, they have more flexible organizations.  They can serve their customers better and they can improve the processes of the bank – many of which are in as a result of the core technologies, not because that’s the way we serve our customers.”

Dave DeCamp is a vice president and the chief solution architect for worldwide financial services at CA. He agrees that the reasons for transformation extend way beyond cost. “Many banks recently have tried to look at this purely as an economic oriented decision – that I will be able to save X number of hundreds of millions of dollars over X number of years if I implement a new integrated core,” he explains. “In many cases, it’s not the outright short-term economic benefits in ‘classic’ ROI. It’s the ability to improve competitive positioning, customer service and business process improvement that’s really driving their decision.” 

For every bank
ATB Financial is not Grupo Santander, but the largest Alberta-based financial institution does have a very enviable record – since 1997, it has reported a profit in every quarter. To continue in that successful vein, ATB is in the process of replacing its core banking application.

According to Mike Redeker, vice president and CTO, this move is for the business, by the business. “We probably spent about 8-12 months just doing planning, going through RFP processes and so forth,” he says. “In January 2008, we made the decision to proceed, and we expect to go live April 2010. This is not an IT project. This is straight from our CEO down. This is a business transformation project  – and core banking technology enables you to make the difference.”

What about the risks in these famously risk-averse times? “We’re in the enviable position that we’re small enough in comparison to the big banks where we believe we can take out our old application and put in the new application,” explains Redeker. “Yes, there will be risks associated with data conversion, some of the business transformation and so forth, but we have a pretty large team in place, focused on the areas where we think we’re going to face risk, such as data conversion, business transformation and so forth.”

Evolution or revolution?
In the last seven to eight years, many Chinese, Indian and European banks have affected a very revolutionary approach to their core banking transformation. A lot of North American banks have not.

Dennis Roman is chief marketing officer for TCS Financial Solutions, a transformation solution vendor. He believes that the different approaches are down to external forces and one key factor... “In India there were many private banks and government banks. And when India deregulated, there was a lot of pressure for innovation. The private banks, who didn’t have quite the ‘footprint’ as a more traditional government bank, they took on transformation very quickly, leaving the government-sector banks behind,” explains Roman. “That became a catalytic event for the government banks to then take it on and do the same thing, which they have done and regained much of their market share. 

“In Europe they were converting to the Euro and incorporating the eastern block, and that kept them pretty busy. They took on transformation as a key enabler to get these things done.”

In North America, however, banks – and the decisions makers driving banks – have a very different profile. Roman: “Just as an example, the CIOs tend to be a little older here than maybe they are in some of the BRIC countries. And those countries tend to be a little bit more risk sympathetic than maybe we are here.” 

What is the key factor? “It’s also true in the United States that, while the technology tends to be quite old, it’s getting the job done.”

Now that US institutions have their own ‘external force’ – and the financial crisis is a doozy – getting the job done is not enough. Transformation is vital. “I think the US market personifies best of breed much more than any other part of the world,” says Sanat Rao, global head of Finacle sales for Infosys Technologies Limited. “Therefore, for a long time, I think banks in North America were really wondering, ‘do I need to change at all?’ It’s our belief that a lot more banks in this part of the world now are indeed conscious about the fact that they need to make a change – and they’re grappling with the issue of how.”

Good practice
According to Jeanne Capachin, to succeed, core systems transformation must have agreement from the whole organization. “It’s not just the CIO’s decision. It’s not going to fly. Everyone needs to buy into this. We’ve seen projects fail here in the US for that very reason – what seemed like a good idea to a portion of the organization really wasn’t fully supported.”

Capachin also believes in managing expectations – “What are the top three or even two things you expect to get from this? Make sure that’s what you scale the project to and focus on, so that you can realize whatever is most important to your organization” – and the importance of a clear roadmap to make sure the project isn’t “going off course” or extending “what might be a 24-month project to a 36-month project”.

When all of this is in place, start thinking about the IT side and, in particular, having a good enterprise IT management framework.

“Really, that’s where our focus has been at CA, being an enterprise IT management tool vendor,” says Dave DeCamp. “Looking at the opportunities that we have to partner with some of these core banking application providers, as well as the ultimate customer who’s deploying that core banking solution.” 

According to DeCamp, what CA have found is a lot of “very siloed, very fragmented” application environments. “There are a lot of very deep, complex legacy dependencies that contribute to that whole bad economic model of spending 80¢ of every IT dollar on keeping the lights on,” he explains. “And only 10 or 15 percent on investing for strategic growth and competitive advantage.”

Then there are the additional headaches associated with integrating a core banking solution. “It brings a lot of additional overhead complexity from a security perspective,” says DeCamp. “Who are the IDs that are coming in and out of the application? How do they get passed down to the legacy applications in a seamless and integrated way, while your in that ‘in-between state’, where I’ve started to implement a new core system, but I have to continue to integrate with my legacy environment.” 

To help, CA have worked with the application vendors to identify the key IT capabilities that will support mitigating risks around the core banking applications.

Key IT capabilities
The first capability relates to the shear size and complexity of these long, multi-year projects with multiple phases, gates, deliverables and resources. 

“That demands the CIO have a solid IT governance and dashboard technology in place that can give detailed, granular information about the status of the project and all those ‘what if’ scenarios. For example: what if we have to add a phase or an integration that we didn’t really account for?” Says DeCamp. “IT governance, project portfolio management, and financial management are a core capability there.

Another risk is that involved in simply introducing a brand new technology stack. I put in the core banking system and suddenly nothing performs well anymore, so it must be the banking application that’s causing the problem. 

“There are so many other things that an implementation could actually draw out in terms of transaction performance and efficiency,” explains DeCamp. “Most firms lack the discipline to be able to look at an entire transaction across an integrated core banking platform and their legacy environment, so there’s a constant battle back and forth, over who’s at fault.” 

Good application performance management and transaction management domain capability that can follow a transaction from end-to-end through the new core system will allow both the software vendor and the client to agree where problems are, and whether they are in the core banking application.

Because you’re worth it
Changing out core systems is never going to be easy. Both evolutionary and revolutionary approaches have their share of risks – but neither is as risky as ignoring the problem.

Jeanne Capachin explains: “In the year 2000, we had the Y2K bug, which financial institutions needed to address. There was no alternative. We had to make the necessary investments. 

“We like to think of this as a Legacy bug that we’re all suffering with, but we don’t have an end date in place that we need to get to. The question is: when is that Legacy bug going to explode for financial institutions?” The answer is simple – lose the rotten core.

What is the role of an IT vendor such as CA?

By Dave DeCamp, VP, Chief Solution Architect, Worldwide Financial Services, CA
There are many very strong, healthy companies that really had minimal exposure to the particular financial instruments that caused so many balance sheets to implode and has resulted in this increased wave of mergers and rescues and bailouts. There are many regional banks who really had no exposure to that market, that have already been through an IT belt-tightening cycle. They’re looking at this as a golden opportunity to jump ahead of the pack.

Although, we don’t yet have public references for how we’ve worked with these banks, there are a number of them that fall into a couple of categories. One notable example is a midsize bank, located in North America. 

They happened to be an established user of many of our EITM solutions, particularly our application performance management, our IT governance, our network management, our service level management technologies.

They already had a well-oiled EITM machine for managing their current legacy application environment, but they’d taken those apps as far as they could possibly go without doing something fundamental. 

They were in a position where they had those foundational IT capabilities in place and operating smoothly, enabled by good IT management solutions to allow them to more aggressively consider deploying a core banking replacement. 

There are other examples, where the banking vendor has gotten engaged with the customer and started the implementation. Suddenly, in the midst of the implementation, they find that they’re having performance related issues – or there is a perception on the client’s part that their application is causing degraded services levels or poor application or transaction performance. 

In many cases we know, it’s probably not the application. Just because the app was put in doesn’t mean the app is to blame. There’s countless other factors that could come into play. If the shop is immature from an enterprise IT management perspective, they don’t have the tools in place to be able to conclusively isolate the problem to either the new application stack or something else in their infrastructure.

In those cases, we’ve partnered with the application vendors who’ve asked us to come in and using tools like our application performance and transaction management, be able to watch that whole end-to-end transaction. And conclusively demonstrate much to the core banking vendor’s delight that it really isn’t their application in most cases and that we helped them find other ways where they can improve the integration to the legacy environment.

The Panel:

Mike Redeker, VP and CTO, ATB Financial
Dave DeCamp, VP, Chief Solution Architect, Worldwide Financial Services, CA
Jeanne Capachin, Lead Analyst on core systems transformation, Financial Insights, An IDC Company
José Maria Fuster, CIO, Grupo Santander