Bangkok--28 Oct--Core & Peak
Author: Gerrit Franzen - Director FSI, APAC, Hitachi Data Systems
Many of the world’s largest banks are cautiously commencing on the journey to upgrade their core banking systems at significant cost. At a high level, this article explores the background and key drivers for undertaking such an expensive and risky exercise.
The process of core systems renewal for a bank is akin to heart surgery as the repercussion of failure is unthinkable by way of loss of reputation, loss of customers, loss of shareholders and/or loss of business. For this reason, all core renewal projects are proceeding on a ‘small chunk replacement’ basis limiting the risk that would be prevalent if a ‘big bang’ approach was undertaken.
For example, as a measure of expense, an Australian bank has set aside $A730m for their SAP core replacement whilst it has been publicly stated the another Australian bank will spend close to $A1b with Oracle iFlex. Both have delivery time lines of 4-5 years.
How they got where they are today
The 1980s was a decade of change for the global banks. Many new aspects to the then very basic banking practices caused pressures for the banks to either build new core banking systems or implement large scale 3rd party banking applications. These 1980 ‘state-of-the-art” banking systems were largely COBOL and/or Assembler based applications.
Some of the key changes that caused the 80s core banking evolution includes:
- Account sweeping: where funds were ‘swept’ from accounts at day’s end for overnight money market activities.
- Offset accounts: that allowed an income producing deposit account to be aligned to an interest payable mortgage account to offset the interest income/ interest payable for tax benefits.
- Tiered Interest Bearing Deposit accounts: where a higher interest rate is applied if the balance exceeded predetermined amount(s) in a ‘tiered’ method.
- The increased complexity of traded Marketable securities particularly 90/180 day Bills used as short term funding instruments for Corporates.
- The advent of Fx trading particularly swap activities, Trade Finance and associated currency hedging and arbitrage opportunities.
By the mid 1990s the ongoing evolution of banking practices facilitated by the “go global” initiatives caused a steady demand for customisation of these systems. Over time, layer up on layer of customisations to meet growing business demands made these systems very difficult to change. This forced the business units to implement application ‘add-ons’ which have evolved to the siloed business model of most banks today. Some banks have over 600 disparate yet specialised applications that underpin the breadth of their business. Normally a middleware platform(s) is needed as a means of integrating the basic customer detail; risk detail and transaction information between these applications (fondly referred to as the spaghetti).
By the 2000s these systems evolved to being very stable, product based systems that offer banking solutions to their customers though, on a ‘take it or leave it’ basis. Today this is a major issue. Even though the ‘baby boomer’ IT staff that programmed and/or maintain these systems are now retiring and the associated maintenance costs often exceeds 50% of the IT budget, it’s the evolving, financially astute customer that has provided the compelling reasons to undertake such risky ‘heart surgery’.
The consequence of not changing core systems
The 2009 banking customer has evolved to an astute, financially aware individual. When coupling this with the convenience of the internet, ‘super-customers’ have emerged who are usually high worth individuals (HWI) that demand specific product mixes based on his/her situation with fee recognition based on his/her relationship with their bank. These important HWIs (serviced via the very profitable ‘Premium Banking’ division) are at risk of shifting niche business to third parties to get the right product at the right price with the right return.
Therefore, the traditional Bank ‘push’ of products is evolving to a Customer ‘pull’ model where core systems are expected to ‘manufacture on the fly’ banking products specific to the customer’s profile and priced in accordance with the customer’s overall relationship with the bank. Legacy systems simply cannot deliver this and the many months of waiting for a new product to be developed is no longer acceptable. Flexibility, nimbleness and innovation exemplify the attributes of today’s core banking requirements.
Banks that are slow to change to the Customer Pull model will become prey to nimbler banks and destined to become the super-customer’s ‘transactional clearing house’.
Not undertaking legacy system renewal could cause a bank to lose relevance with HWI customers and in the process impede low cost funding capabilities by loss of deposit funds, losing HWI niche financial business to third parties and ultimately, losing the HWI to a more nimble, innovative and CRM focussed competitor.
How Can Storage Solutions Help?
The Core Renewal projects are big and risky. Security, certainty and timely execution of the data movement are paramount to the success of these projects both during implementation and after. This is ‘heart surgery’ for any bank as it goes to the crux of their business. Any solution that leads to minimising risk will be welcomed by the bank’s core renewal team. Technologies like Hitachi Data Systems’ Storage Virtualisation, Dynamic Provisioning offer key benefits that every bank must be made aware of. During systems implementation, the speed of version changes, and the strength of disaster recovery and back up technology solutions is very critical. A consolidated storage environment can increase core banking performance and simply the storage management process.
Being able to do trial conversions and/or system testing using easily gained copies of old/new applications with minimal human intervention would be of huge benefit. Viewing this from an Operational Risk perspective, Hitachi Data Systems’ capabilities could improve the risk profile to have a positive impact on the bank’s risk weighted assets.
For more information, please contact;
Srisuput Siangyen
Core & Peak
Tel: 0 2439 4600 ext. 8300
[email protected]