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Banking systems today are like the tower blocks of the 1960s and 70s - tired, inflexible, technically outmoded and inappropriate for the job they were initially built to accomplish. Hugh Croxford, head of business development at Sanchez Computer Associates looks at how banks can gradually relocate to more modern, IT housing without demolishing the legacy architectures of the past.
It is increasingly difficult for a retail bank to improve its performance. Both the revenue and cost curves are beginning to plateau.
The easier ways to improve revenues and costs have been tackled, and the banks are now looking at the rock face. Both revenue and costs are about processes and procedures. A primary component of these is the contribution information technology can make.
Banks are not always helped by the IT industry, which often pushes solution technologies looking for a problem. From time to time it comes up with silver bullets to crack problems. The business results banks gain from these new technologies are not apparent from performance analyses.
Banking systems today are like the tower blocks of the 1960s and 70s. The problem was to provide housing. State-of-the-art engineering and technology was used to build it piled inflexibly one on top of the other. Over the years, and despite efforts to improve the blocks and their environs, there was no way to avoid the realisation that the tower blocks are now technically, socially, financially and environmentally inappropriate. Their major problem is inflexibility. A tower block is a tower block.
The core IT systems in banks today still revolve around the implementations of the 1960s and 70s. It is not unusual for a bank to have 30+ million lines of software code, complicated systems flows, and a far from ideal overall solution. Ideally a bank wants a nice open-standards system with well-documented plug-and-play components. But the reality is they have a series of complex systems and multiple standards. How can a bank move from an IT tower block to its preferred IT housing?
Ripping out and replacing a complete system is risky, costly and time consuming. It may be the solution for tower blocks, but not for banking IT systems. Incremental change of computer systems through displacing parts one at a time is a far better strategy. Not everything breaks at once, so not everything needs to be replaced at once. There are, in all, a few dozen significant components in a banking system, each with its own lifecycle.
The creation of the new environment and the engineering and technology choices are the pre-requisite first step. The technology landscape is settling down with some fairly secure standards. Banks can adopt common standards and then select the components they want to change or add.
They can build a parallel architecture of three tiers with the new standards. The middle tier isolates the back end applications from the front customer-facing links. Say the first problem is in mortgage handling; they can implement a new component for this within this new environment. This new environment links to the legacy systems and can be linked to external services. They can migrate customers onto the new products and rid themselves of their tangled history. Business can continue uninterrupted and completely transparent to the customer.
Sanchez calls this approach Line of Business Migration and is implementing it for banks seeking lower risk, lower cost routes. This methodology also provides financial institutions undergoing a merger or acquisition with a mechanism for consolidating different systems so that they can more quickly realize the value of newly combined assets.
Over time, by choosing and changing components part by part, they are implementing a displacement rather than a replacement strategy. They will avoid spending on silver bullet promises. And they can run their systems more cheaply than those who go for the replacement strategy. The advantages of these lower costs can be shared with customers to improve revenues. A win all round.
This displacement strategy can be the foundation for modern IT systems - straight through processing resulting in the optimisation of the labour force and dramatic reduction in the number of personnel. It also enables more control over system scalability and reduced maintenance costs. Perhaps most importantly, improved customer service and customer knowledge resulting in true CRM.
Replacement equates to ‘big bang’, revolution, risk, cost and time. Displacement equates to evolution, smaller steps, quicker returns, and safety. The difference is more than semantic.