Core surgery a necessity as banks lose faith in legacy systems - Finextra

A clear majority of banks believe that they will have to overhaul their core infrastructure over the next three to five years if they are to face off the threat from more agile competitors, according to research conducted by Finextra.

The study, 'Invigorating Banking', conducted on behalf of next-gen banking vendor Five Degrees, calibrated responses from 126 participants at 96 different financial organisations in 38 countries. It finds that banks are losing faith in the ability of their legacy systems to withstand the strain of customer requirements for a digitally-led banking service.

While 78% of respondents agreed or completely agreed that modernising the bank can be achieved by investing in multi-channel and front-end engagement, fully 65% felt that their existing core system could no longer support its needs.

When looking at plans for core banking system replacement, 61% of respondents agree or completely agree that this will need to take place in the next three to five years. This rate was even higher when the respondents only from South America, Middle East, Africa and Central and Eastern Europe are considered together. Among banks from these regions, which contain mostly developing economies, 89% agreed that they would need to undertake major surgery in this timeframe.

Despite the reservations, not many of those surveyed demonstrate a clear appetite for a rip and replacement strategy. Indeed as many as half of those who responded positively to the question felt they would be unable to get boardroom approval due to the risks, costs and failure rate associated with such a massive IT overhaul.

The dominant drivers for seeking modernisation are familiar, and it is not surprising to see the majority of financial institutions embrace them. But what is more unusual is to see the high number of respondents who agreed or completely agreed that opening their systems to third parties is part of their modernisation agenda, in order to leapfrog new market entrants and act as a wholesale distributor of financial services via a network, market or API approach. 63% of respondents agreed or completely agreed that this is something that they want to do.

About the study:

We used a six-point Likert scale to get respondents to show their level of agreement or disagreement with a number of statements about their business grouped under five themes - the perceived need for invigoration, the drivers, customers’ changing demands, what’s blocking progress, and the impact of new entrants to the industry. Throughout the analysis we have paid more attention to those who felt strongly either way, discounting those more neutral respondents who selected slightly agree or slightly disagree.

We received 126 responses from 96 different financial organisations and 38 countries. Where multiple responses came from a single large financial group they were frequently from different geographies or business units -- e.g. cards, retail, transaction banking or financial markets. 54% of respondents came from Western Europe, with the remainder spread worldwide. Where regional differences in responses were apparent, this has been noted in the analysis.

You can download the full report from here.

Channels

Retail banking Wholesale banking

Keywords

Core banking systems

Comments: (2)

Oleg Popov - Temenos UK - London 09 February, 2015, 13:15

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Failed to spot the following dimension in the results statistics: out of those 65% who think their CBS is inadequate and 61% who think their CBS needs to be replaced in the short run, how many have in-house developed CBS and how many have industrial solutions from external vendors, plus for the latter - how many of them have CBS from the top 5 vendors (say, as per IBS Sales League ranking)?

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Derek Britton - Micro Focus - Newbury 10 February, 2015, 16:27

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Illuminating article. It is interesting to see how the term 'legacy' is being used here. It is being seen in a pejorative sense - indicating systems are old, outmoded, risky to maintain. This label is somewhat dangerous and unhelpful. The cause of the issue may not be because systems are older, indeed age may not be relevant at all. There may have been insufficient funding over time, a lack of support for new technology or an inability to change these highly complex systems. While some systems may indeed be moribund, and a negative label may be justified, many are vital core banking systems which continue to support the back office or other key internal functions, especially in more established organisations. And it is unhelpful to attach a negative label to a system that continues to thrive and provide key business capability.

It is no wonder that there is little appetite for wholesale change within the banking industry if we continue to refer to such systems negatively. And this is partly fuelling the decision by many traditional banks to implement ambitious replacement projects, which in many cases fail to materialise. As another comment on this article suggested, a lot more may be possible with home grown systems (which have suitable internal resources) as the bank can still maintain control of the future of it, rather than an off-the-shelf commercial package - where the future of it may be tied in with the vendor.

The British banking heritage has been built on highly reliable and efficient mainframe COBOL systems that have, over time amassed data and core functionality critical to the system's longevity and business needs. According to research by Vanson Bourne, 590 global CIOs and IT directors expect their financial organisations to continue relying on mainframe applications for another ten years, with almost a third (32%) believing the timeframe to be longer than this. Using a modernisation approach that first deciphers the issues amid the technical complexity, streamlines the process of change, and supports new requirements without impacting business is critical. By harnessing contemporary technology but which helps evolve, rather than replace, these knowledge-rich existing systems, banks can meet new demands without introducing unpalatable levels of risk.

Derek Britton, Director, Micro Focus