Major retail banks have built their core systems piecemeal over several decades. The resulting lack of scalability is restricting their business development, forcing banks to consider the viability of breaking with the past. Packaged core systems vendors need to brace themselves for the opportunities and challenges of retail core systems replacement.
Retail banks are being increasingly hampered by their archaic core systems.
A core system lies at the heart of a bank’s IT infrastructure, containing records of all transactions. Major retail banks’ core systems have traditionally been developed in a piecemeal manner, with little attempt to instigate wholesale change throughout the entire system architecture.
These systems are struggling to serve banks’ future needs. Many are written in languages like early COBOL, or even proprietary assembler languages. These systems can be difficult to use, with a simple change in interest rates requiring several hours of coding to implement. Worse, the age of these languages means that documentation and engineers are becoming scarce.
The lack of flexibility is becoming problematic. For example, since 60% of UK account holders have no loyalty to their bank, banks need to try hard to maintain their customer base. An excellent customer retention strategy is to cross-sell customers several products, which requires flexibility in product creation. Achieving this with legacy core systems is time-consuming and expensive.
Unfortunately, a core system replacement is the most risky, complex and expensive project a bank could undertake. Doing it in-house may seem natural, given that major banks’ IT departments have billion dollar budgets and hundreds or even thousands of staff – but their track record is not enviable. An estimated half of all internal IT projects in banks fail.
Using an external vendor requires a significant leap of faith, not helped by past high-profile failures. However, the packaged software solutions available are a significant improvement on their earlier versions. Nearly all vendors now offer a modular approach, enabling a separate business case for each stage of implementation.
Ultimately, the adoption of packaged core system will depend on the business side of the bank buying into the project. Hence, vendors need to create a ‘business hook’ for the implementation of a packaged core system. In short, they must prove both the technological and business benefits of their products. Several strong reference sites, expected to appear in the near future, may lead the way.