In Europe, the open standards movement is gaining momentum.  It is increasingly accepted that standards collaboration increases organisational interoperability, ensuring that different systems can communicate effectively, while dramatically reducing IT spend on costly integration. 

In the Asian-Pacific region, however, we have yet to see this movement towards open standards.  Arguably, this must change. 

According to an independent report by IDC Financial Insights, ‘The New Core Banking Systems Marketplace in Asia/Pacific – It Gets More Interesting from Here’, the next three years will see one in four of the largest APAC banks embark on a major core modernisation project.  Michael Araneta, associate consulting and research director for IDC Asia/Pacific, said of the findings: “We expect at least 32 of the top 120 Asia/Pacific ex-Japan banks to undertake significant changes to their current core banking systems from now to 2015." 

What are the problems associated with core system renewal?

Headlines of a new wave of core system renewal projects may be good news for software vendors and service integrators, but for banks these projects are approached with a huge amount of trepidation – often compared with open-heart surgery.  For one thing, they represent a significant IT spend.  A recent report by Celent tells us that in 2011 alone $4.8 billion was spent globally on core systems.  A complete core system renewal can cost tens of millions of dollars, with a large percentage of this sum coming from integration costs.  Integration costs are often as much as triple the purchase cost of the original software and as a result, many banks are opting to replace specific parts of their existing IT, which have either become obsolete or are difficult to maintain, with off-the-shelf software.

Of course the main concern – above IT cost – is the potential disruption to services, which would impact on a bank’s competitiveness and customer service. 

Asian banks must consider open standards as banks embark on these core system renewals.

Banking standards communities are currently dominated by European and North American banks and vendors, whereas there is little interaction from the Asian community. Perhaps there has not been the need to enter into working groups with peers to-date, however with this wave of core banking renewal on the horizon, I imagine we will see more interaction from our Asian peers.

As IDC Financial Insights points out, as Asian banks look to grow regionalised or super-regionalised businesses, the best solution to software and data problems is a gradual re-architecting of data models.  However, as Asian banks ‘scrub up’ to take on the upcoming challenge of core banking open heart surgery, they need to look to their European peers who have been through this huge undertaking in the past.

Through the adoption of open SOA standards, much will be learned and costs will most definitely be saved. There is a tremendous opportunity for these Asian banks to leapfrog their counterparts through focusing on bringing new and improved functionality to market, at a greater speed.  This is good news for banks, for which innovation is the key to staying ahead of competitors, but it is also good news for software vendors, as banks are then increasingly willing to invest in IT.

As APAC banks look to modernise their core systems, I do predict we will see increased interest in open standards, in order to tackle two of the key barriers to core system renewal: cost and risk.