Thursday, August 21, 2014

Considering a Core Data Processing System Conversion - Think Twice

A Microsoft white paper in 2008 said the banking market is ripe for a massive conversion
of legacy core data processing systems (core banking system), most of which were architected and built in the 1970s and early 1980s. 

Earlier this year another prominent consulting group came out with a similar prediction. Close to ten years into the forecasted massive core conversion prediction, ..... it hasn't happened. Heck, even the local TV weatherman would have trouble keeping his job with a forecasting track record this off the mark. 

With all these predictions of banks and credit unions rushing to upgrade or replace their core banking systems, why hasn't it materialized? First we need to understand what is driving the desire to change core banking systems. Before we get there, we need to develop a common understanding of what comprises a core banking system

Even defining a core banking system isn't that simple. Just what is a core banking system? The answer depends on whom you ask. This seemingly simple question is complicated by a dizzying array of products and vendors in the market today. Many vendors describe their products almost entirely in terms of end-state benefits, dangling promises of real-time processing, service oriented architectures (SOA), and “bank in a box” solutions that offer end-to-end integration. As a result, the definition of core banking systems varies widely. 

Some credit unions and banks only seek to refresh an ageing MIF/CIF (Member/Customer Information File) or GL (General Ledger). Others believe a core banking system is much more comprehensive solution and is the  backbone of a credit union or bank. A core banking system that supports a wider range of systems, applications and databases as credit unions and banks wrestle with business, member/customer and regulatory demands. A core banking system may support member/customer relationship management (MRM/CRM), business process management (BPM), business intelligence (BI), business rules, risk and fraud management, anti-money laundering (AML), online and mobile banking, treasury, finance resource planning (FRP), asset liability management (ALM), general ledger (GL), regulatory compliance, transaction throughput, interest and fee calculation, parameterized product setup, transaction clearing and many other functions. The first thing a credit union or bank needs to do is define, "what is the executive team's definition of a core banking system".

Back to the first question, "what is driving the desire to change core banking systems"? 

The existing core banking systems are rigid and inflexible because of the complexity, age
of the design and multiple platforms, which makes it hard to understand, run and change. Changing the platforms to comply with regulatory requirements and to respond to round-the-clock digital banking needs is difficult. Driving the desire to change core banking systems are six common themes that can be easily identified:
  1. Total cost of ownership: The cost of running core banking platforms is considered to be too high. Cost reduction is needed to restore the competitiveness of credit unions and banks.
  2. Complexity: The complexity of core banking platforms and processes is seen as a very big challenge. This complexity has a significant impact on the ability of the IT team to track down issues. The cost of running, updating and changing the platform increases because of the complexity. The challenge is exacerbated in many organizations by the need to support and maintain multiple platforms, sometimes as a result of past renovation initiatives.
  3. Age: Most organizations have aging systems that are forty years old or are even older. Keeping legacy platforms current requires ongoing investment in compliance, security, flexibility, functionality, and speed to market. Finding ways to retain skills and knowledge of the legacy technologies and the systems themselves is also a challenge.
  4. Regulations and compliance: Regulations and compliance are consistently reported as a significant challenge. The pressure is exacerbated by the speed at which bad news travels because of instant social media communication. The cost and time of making compliance changes is also a major challenge.
  5. Batch-focused systems: Most core banking platforms are basically batch systems. Adapting them to support the always-on channel solutions of mobile and internet banking and making the credit union/bank appear to be functional round the clock is a significant challenge.
  6. Support for front office digital channel: According to the Microsoft white-paper, the majority of credit union and banking executives believe that core banking platforms will inhibit the development of front office solutions, rather than enable them. 
Many credit union and bank leaders plan to implement transformation strategies that specifically address front office digitization. Banking leaders who plan to transform the core banking platform for front office digitization expect to enable front office change by implementing enterprise middleware platforms and portals that use well-defined system interfaces.

So maybe the "big bang" is not going to happen 
after all. Their is growing consensus that
a migration plan is the best approach to deal with the deficiencies of core banking systems. In my opinion, as an past executive of a core banking system vendor, there has been very little progress made by North American core banking system providers towards architectural modernizing of their core banking systems. Oh sure, they have added new JAVA or .Net presentation layers, but the fact remains, the core architecture and application stack remains essentially that same as it was 30 to 40 years ago. How does that saying go, ............ "it is like putting lipstick on a pig".  With such a stunning lack of progress why would any credit union or bank what to upgrade its core banking system. In the year 2014 would you upgrade your 2000 Chevrolet for a 2005 Ford?

Is it surprising, then, that while the industry has been talking about legacy modernization and predicting growth in the numbers of banks and credit unions replacing their legacy core banking systems since the early 2000s, most banks and credit unions have hesitated and put off a core conversion? Despite all the media and consultant reports that core conversion are about to bust loose, it hasn't happen. Many credit union and bank leaders wish to evolve the architecture of their core banking platform as a strategy to achieve their objectives. The adoption of enterprise-wide enabling technologies such as business rules engines, master data management, analytics and business process management are seen as significant reasons for their wish to move to a more flexible architecture. Surrounding legacy systems with a multichannel and omnichannel architecture that has strong process and workflow capabilities; externalizing specific banking services such as MRM/CRM, payments, origination, document management and others, and ultimately migrating the remaining legacy system code to a different platform.

With the lack of modernizing progress that most North American core banking system
vendors have made, I believe it is smart business to evaluate middleware and portal solutions before making a core banking system change. In fact, I will go on record and suggest that "with the technology tools currently on the market, the smart money is investing in those solutions and solutions that can overcome most of the weaknesses of the legacy core banking system". This could make core banking system conversion obsolete, or at least, buy multiple years to allow existing or new core banking system vendors to prove their worth with open, modularized, and modern architected systems. 

In my opinion there are two obstacles that still need to be addressed with a migration instead of replacement strategy. The most difficult is batch focused systems. Batch processing is a legacy from the 1960s. In today's modern world, batch processing should be an obsolete term in core banking systems. I can assure you, despite what you may be told, all the core banking systems utilize some form of batch processing. In a 24/7 365 always on world, batch processing is the enemy of the desired member/customer experience. Members and customers want, expect and should get real-time access and transaction processing with up to the second accurate information. The core banking systems are not architected to support online, real-time processing 24/7, 365 access and processing. 

The second challenge of a migration strategy involves integrating all these systems, applications and channels and orchestrating banking processes from front to back – especially given multiple underlying operating systems and communication protocols. Even if you can get them to communicate, do the systems work together to provide a unified user experience. 

What does core banking systems have to do with omnichannel banking? It is the reason we are talking about omnichannel banking instead of already having implemented it. Omnichannel banking's implementation obstacle is the legacy and disparate technology solutions that are not able to support omnichannel banking.  Omnichannel banking is the seamless convergence of all credit union member and bank customer interaction channels delivering a consistent and uninterrupted experience, regardless of what or how many channels a member/customer uses to connect with the credit union or bank. Omnichannel banking is an “end goal”, not a product, service, or marketing campaign. Omnichannel is the breaking down of silos that exist with most traditional financial services providers. It is the entire member/customer experience. It is how credit unions and banks interact and reach out to their members/customers, both digitally and within the brick and mortar of their buildings. 

Almost all the core banking system platforms do not support an omnichannel banking strategy, therefore a core banking system change is not likely going to help you implement that strategy. But the good news is there are options that will work!    

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