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Why a Core Banking System Conversion is the Wrong Approach

Ah, remember the old days……, the days when you had to get to your bank or credit union branch before 2:00 PM in order to get a deposit recorded as a transaction for that day. Fast forward to today. As Tom Groenfeldt, contributor to Forbes so eloquently writes, “When 40-year old legacy banking systems meet the two-month old iPhone 6, the results aren’t pretty.”  The same thing that happened 20 years ago when a customer visited a branch still happens to you and your iPhone 6 or tablet today. It encounters batch processing. We are in the era of real-time transactions, real-time processing, and instant access to data, yet banks and credit unions cannot consistently deliver that experience to their customers or members.  So much time has passed yet so little modernization progress has been made with North American core banking systems. The very systems that drive your credit union or bank. How can you compete against the up-starts, neo-banks, and fintech companies that seek to take piece by piece your most profitable business and leave you with the burden of regulation and no profit transactions when your core banking system is so far behind?   

Core banking systems, also known as core data processing systems were architected and built 30 to 40 years ago. They were designed more than 20 years before anyone heard of the Internet and their basic architecture has not changed since then. They were built to handle internally generated transactions from tellers, loan officers, CSRs and back-office support staff. They most definitely were not designed and still are not designed to meet the needs of external users such as customers and members. As a former executive of a core banking system company, I have seen the inside of the belly of the beast and it is not pretty. They say that if you see how sausage is made most people wouldn’t eat it. At least the finished product generally tastes good. If you saw how core banking systems are architected, enhanced and maintained, the spaghetti code cobbled together, and the lack of documentation you would not want to rely on it to run your bank or credit union. The worst part is many banks and credit unions have a hate/hate relationship with their core banking system and their provider. Why, because the core banking systems in use today, simply were not designed to meet the needs of today’s credit union and banks. As much as your core banking system provider may want to give you what you want, they can’t. Their core banking system solution simply was not designed to meet the needs of modern banking and their customer’s expectations, real time processing, transactions and data management. They are built on outdated technology, they were built around batch processing, and they have enhanced using Band-Aids and patchwork.   

So what are banks and credit unions that do not have the resources of the major national and super-regional banks to do in this situation? Converting from one core data processing system to another core data processing system is like adding internet radio to your 300,000 mile 15 year old car. It may provide you with a feature you are missing, but what happens when the engine blows up?

Fortunately, there are options, and the best part is the options come with far less enterprise risk than a core banking system conversion and will add long-term functionality and architecture that will allow your credit union or bank to move into the world of real-time processing, transactions and data management, and personalization.

Components, APIs, standards and the cloud allow banks and credit unions the opportunity to explore true alternatives to the zero sum game of a core banking system conversion. Componentization, APIs along with emerging standards such as BAIN (banks) and CUFX (credit unions) and internal or external cloud  environments allow banking systems to more effectively communicate with each other and allow banks and credit unions an opportunity to create their own Services Orientated Architecture. An SOA will modernize the technology environment by allowing credit unions and banks to mix and match technology solutions they need to adjust and drive their business model and the ability to quickly adjust and implement new solutions.   

Combining a presentation platform on top of a security layer, an integration layer with business and workflow engines, data analytics tied to back-end and stripped down core banking legacy systems will provide credit unions and banks with the flexibility, agility and lower risk profile necessary to offer members and customers the solutions they demand in order to compete in the rapidly changing retail financial services market.

Before your bank or credit union considers a core banking system change evaluate the alternatives which will be less expensive, have a lower risk profile and can be operational much faster and positions your bank or credit you to be agile in the quickly evolving retail financial services market.  

 

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Comments: (4)

A Finextra member
A Finextra member 07 January, 2015, 05:101 like 1 like

David Gibbard, I too have seen inside the belly of the beast having helped to implement core banking platforms, FX platforms, Mobile, Digital and Branchless Banking systems and more for a number of banks around the world for many years now.

This is a great piece as you have not just said what the problem is but you paint a great "To Be" Architecture. I guess what would be great is to have a follow-up blog on this that would help banks and credit unions to visualasize how they might go from the "As Is" to the "To Be", which is where most of the good intentions fail.

Now the clouds are clearing, banks must rebuild a trusted, viable business model for themselves from the ground up. But this requires support from an appropriate set of platforms and you beautifully show a number of key elements the new platforms will require.

From the work we at Shift Thought do in each part of the world we're seeing the rise of Payment Banks. These have the ability to begin with the right architecture in place and adequately support the new high volume low cost business they must succeed at. The jury is out on how they fare, but this will further exacerbate the need for the big banks to bite the bullet and build from the ground up.

A Finextra member
A Finextra member 07 January, 2015, 07:321 like 1 like

David, as vendors in the Core Banking SaaS space using the BIAN framework and having all the component offerings you mention in your piece - SOA, API's etc., we find it terribly difficult to get the message across to banks without sounding like we are accusing them of being incompetent and irresponsible with the future of their organisation. We really want to scream 'what's your excuse now for not undertaking transformation projects!!' We have done everything banks demanded; reduced the reliance on people, made the platform agnostic, put the whole shebang into the cloud to bring massive agility AND reduced the cost significantly. Seriously, what more do the banks want! Their reply tends to be 'sounds too risky - let's stick with what we know!' I think banks are likely to go the way of the dinosaur as disruptors starts to really bite! Thank you for a very refreshing and 'to the point' article.

David Gibbard
David Gibbard - OmniChannel & Digital Banking - Suwanee 07 January, 2015, 14:28Be the first to give this comment the thumbs up 0 likes

Charmaine and Deborah, thank you for your feedback. Deborah, I can assure you that the North American domestic core banking system providers have not adopted the approach your company has undertaken. 

There really is a huge opportunity in North America, but the problem is, relative to banking around the world, the North American banking market is made up of a large number of relatively small banks and credit unions. There are over 14,000 banks and credit union in North America. That makes entering the market very challenging and expensive. 

 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 08 January, 2015, 09:58Be the first to give this comment the thumbs up 0 likes

Banks have been offering realtime corporate payments (Fed, RTGS) for a long time despite legacy systems. 

Legacy IT landscapes haven't stopped banks from developing algo trading systems that work so much in realtime that even the speed of light has proven to be a limiting factor in their operation. Interestingly, an HFT doyen is quoted in Michael Lewis's latest bestseller Flash Boys as saying that he acquired the superior skills required to develop algo trading software because of his experience with legacy mainframes.  

So banks can easily offer realtime retail payments over their present legacy estates (as many of them have already done in UK via FPS). But they'd lose float income in that case. And that could be a HUGE problem, come bonus time!

IMHO, only legislation can compel banks to offer realtime retail payments. Legacy is only a smokescreen, perhaps meant to keep the regulators at bay and to send fintech professionals on a wild-goose chase!