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Banks & core conversions 5/26 banktech.com It houses a bank’s primary deposit & loan information systems, & helps the bank provide myriad day-to-day services. It’s the core system. Without it, a bank would crumble. Given the state of most banks’ core systems, however, it’s a miracle that they are able to function at all. It may be the heart of the bank, but the core system often is held together by a complex & tenuous web of technology designed to force disparate systems to talk to one another. As the pace of change in the industry continues to accelerate, banks are beginning to realize that they might just need a heart transplant. ‘I see some large banks spending millions of dollars a year to deal with their old batch systems to help them respond to customer demands in real time,’ says Bart Narter, Celent. ‘When you’re looking at 9 figures a year in additional maintenance costs, you start to think it might be worth it to migrate to a new system. It’s getting out of control.’ Undertaking a core systems replacement is risky, which is largely why, with a few exceptions, the US market has seen little movement in this area. Banks face the quandary of whether to take the risk of replacing their existing core systems or simply to try to hold the old ticker together by piling on the middleware layers. Yet it’s that specter of risk & uncertainty that keeps many from taking the plunge. ‘It’s like a heart surgery,’ says Wayne Busch, Accenture. ‘You won’t do it until it’s absolutely necessary.’ Insiders agree that banks are thinking much more seriously about replacements than they have in recent years. ‘Almost every bank is looking for options to enhance its environment,’ says Zeynep Fredrick, Webster Bank. ‘Those still running mainframe systems see that it’s costly, & they can’t justify the return on investment. There’s a need for more real-time solutions.’ CG Kum, First California Bank, says there definitely is more talk in the industry about the viability of current core systems. ‘Over the past couple of years, my peer banks have been evaluating their core systems, in part so they could avail themselves of better technology that’s more affordable.’ The benefits of the new generation of core systems, suggests Dan Drechsel, SAP, include improved agility & systems integration. ‘The new systems are based on SOA service-oriented architecture, a common integrated platform for visibility into CRM, customer information & transaction banking systems. This combination provides a core level of agility for financial institutions to take advantage of for a long period of time. Most believe this generation of SOA-enabled, built-from-scratch architectures will be able to withstand the 30-year duration that banks are accustomed to.’ The US is lagging behind even other parts of the Americas in terms of core replacements. Drechsel has seen more interest among banks recently in core systems replacement. ‘We’ve seen more RFPs in the last 6 months from US banks than we have in the last 5 years. They’re doing investigative work now.’ A lot of that investigative work is being driven by changing consumer behaviors & expectations, particularly in terms of real-time transactions in the payments space, according to Narter. ‘I’m seeing the banks look harder at their core systems mainly because of debit cards. These are real-time transactions that are irrefutable. They’re not like batch ACH transactions. You need real-time balances & real-time risk analysis because these payments are occurring in real time. The old systems were optimized for processing batch payments, such as checks. Payments & information demands will continue to go to real time & will drive a lot of the changes at banks as they move to the payments systems of the future.’ Open Solutions, which caters to midsize & small banks, has noticed an uptick in business over the past 12 - 18 months, according to Mickey Goldwasser. ‘The reason they’re looking is that a lot of their systems aren’t cutting it anymore. The competition is changing, & they need to address different demographics as they come into play.’ Don Free, Gartner, adds that while ‘There haven’t been any visible changes beyond the normal replacement cycles, under the covers, I am hearing more noise, especially among the midsize banks.’ It’s no surprise that most of the action in core systems replacement is occurring among small & midsize players; size definitely is a factor when considering core replacement as the amount of IT complexity & risk varies according to a bank’s size. While the large, global players are using the vast resources at their disposal to maintain & upgrade their existing legacy infrastructure, the smaller players, though lacking in comparable scale, see an opportunity to dramatically modernize. According to Free, it’s becoming a matter of survival for midsize banks to reevaluate their current systems. ‘Midsize banks are disappearing. Either they’re growing larger or they’re being acquired. These are grounds for developing business drivers around core replacement. They are seeing edicts from the board to position themselves for the future. By updating their cores, they become more agile. Being competitive today requires more than the typical transaction processing that legacy core systems perform.’ & competition in banking is growing more fierce every day - not just from domestic banks, but from foreign banks & nonbanks. ‘Of the top 15 banks in the US, 1/3 are foreign,’ pointing out that foreign banks often bring different business models to the US market, along with their own technologies that tend to differ from typical US bank deployments. ‘They do bring some advantages to the table that the US banks don’t have.’ The fact that foreign banks use vendors from their own regions is one factor contributing to the growing disparity between the systems found in US-based banks versus others. According to Busch, there are differences in core technologies based on geography. SAP often is deployed at European financial institutions. SAP is bringing its enterprise know-how into the core systems space. ‘They’re not looking to only slightly improve the existing platforms, but to create a new set of capabilities on a new platform with real-time processing. They bring to bear standard software & integrated platforms.’ But this doesn’t necessarily mean that the solutions are better than those offered by US-based core systems vendors. ‘The banks that use SAP might have a superior architecture, but they often lack some of the business functionality necessary to compete in the US market.’ Busch explains that the issue of ‘localization’ - ensuring that systems are updated to reflect the regulations & products unique to each market - often drives a bank’s decision to tap a local vendor. The technology divide between US banks & nonbanks in the financial services space is even greater than the disparity between domestic & foreign institutions. Particularly in the payments & lending areas, banks face competition from upstarts that aren’t hindered by legacy architectures, observes Mike Nicastro, Open Solutions. ‘They’re using relational systems that help them better understand their customers,’ adding that while banks want to pursue relationship-based banking, in many cases their systems still are accounting-based. ‘Banks need a relational/rules-based system that tells them what to do. Legacy systems can do this, but you need to create other systems to make it work.’ Given the limits of legacy core systems & the increasing pressure from more-modern competitors, banks are upgrading their technology, according to Christine Pratt, Financial Insights. ‘To say no one is doing anything would be wrong. They’re all doing it a little differently. It’s a question of where you put your money.’ The banks have replaced their core systems to one degree or another. They all fall into the upper end of the midsize sector. While their journeys along the core replacement road have taken different turns, the one unifying theme appears to be their desire to have a system that will grow with them. According to First California’s Kum, the bank underwent a core replacement 3 years ago. The bank was growing rapidly, mainly through acquisitions, & decided to reevaluate its existing systems. ‘At the time, we were a $300m bank, & we knew we were going to grow. So we wanted a system that would grow with us.’ The bank chose to outsource its core processing, selecting the iCore client/server-based solution from DCI. ‘We were growing. So our IT world became more complex. But the DCI core solution let us integrate our acquisitions much more easily.’ The new operating model is more agile & gives the bank more control over its IT-related needs. ‘With the legacy system, everything is dictated to you, & the professionals who grew up in that environment became order takers. We want our people to have an element of creativity.’ Kum acknowledges that the replacement was disruptive. If any glitches occurred it was more likely due to the humans than the technology. ‘We had several individuals who grew up on our legacy system who were afraid of the core switch. But they were the first ones to admit that the changeover wasn’t as bad as they thought it would be.’ Noting that mergers & acquisitions often contribute to the core systems problems that banks experience today, David Wegman, Fiserv ITI, contends that a good core helps ease the process of integrating the acquired entity onto the main platform. Vendors often will assist with the process. ‘We have a team that helps convert banks acquired by our clients onto our core solution.’ Webster’s core replacement came about as a result of a decision to change its charter. Webster originally was a thrift. Due to an increasing commercial client portfolio, it became clear that if the bank wished to continue to grow it would need to convert to a commercial bank. Part of that transition involved converting its systems as well. ‘We were an S&L until 2004. But in 2004, our systems were effective for a thrift, not a commercial bank with commercial loans & cash management clients. It didn’t support our growth plans.’ Webster uses the core platform from Fidelity IFS. ‘This runs on a mainframe, but we look at it as a utility - it’s not what will differentiate us. Instead, we focused on the channels & implemented new technology there. We built an SOA middleware layer so we could act in real time & not have to worry about going to the mainframe to make changes in COBOL.’ This was Fredrick’s 2nd core replacement in her career. ‘One thing I noticed that never changes is that people underestimate the amount of training you need to give your employees. We tend to overestimate people’s ability to learn these new things. One of the most difficult parts of a core conversion is educating people on the new system & processes. Ultimately, the execution is in the hands of 3,000 people. I’m not trivializing the IT aspect of the conversion, but I do think most banks overlook the training aspect.’ While growth is a primary driver of core conversions, sometimes banks start down the road to a core replacement almost unintentionally. That was the case with Middlesex Savings. According to Chuck Bauer, the bank was looking for a new front-end teller system. ‘We had a teller platform for 2 years when we were informed that the vendor was discontinuing support for it. As we looked for a new system, we realized we were limited in what we could buy because of our legacy mainframe transaction-processing engine. So we decided to broaden our search to find a new core system that would support a new front end.’ Middlesex selected Open Solutions for its new core. But the bank didn’t do a wholesale replacement of all its applications. ‘What was appealing about Open Solutions is that we were able to keep in place our ancillary applications, such as the GL system & online banking, & create interfaces using Open Solutions,’ adding that the bank moved from its old mainframe system to a Unix platform running on HP hardware. Middlesex Savings now has a system that will grow with it. ‘Our mission was to become more oriented to sales & service. We have the ability to do that now & provide information to the people dealing directly with the customers.’ A benefit to the conversion was that the bank gained access to more skilled IT people. ‘When we looked for people to help support our legacy mainframe systems, we found that experienced help from that era was hard to find. The new system gives us the ability to run industry-standard applications, & we now have a wide range of folks to choose from.’