Dancing with the Dinosaur

I was reading an article authored by Marc Rapport, senior writer at Callahan & Associates, called “All For One or One For All?” comparing the different technology strategies of two credit unions in close proximity to each other and both relying on select employer based growth. The two Midwest credit unions are BCU (formerly Baxter Credit Union) and Four Points Federal Credit Union.

What struck me was how different these two credit unions view their technology strategy and how one of the two credit unions is completely comfortable allowing their future to be dictated by a company that may or may not have their best interests at heart.

According to the article, the reason Four Points Federal Credit Union is willing to allow this level of control to a third party core data processing vendor is “trust” and “we could have gotten different components from different companies and then have them dicker with one another all the time, but I don’t have time for that”. The credit union CEO goes on to say, “Regarding its new provider, the agreement stipulates that the credit union will not face any rate increases throughout the life of its contract. In addition, the credit union’s staff will also likely benefit from the new system’s enhanced core accounting functions. The member service pieces are intuitive and seem easy to learn and use.”  He further goes on to say, “This whole idea of putting all your eggs in one basket can be an issue,” he says. “But I’ll take that over the alternative of integrating everything and managing different vendors.”

WOW is all I can say. Let go through this point by point.

We could have gotten different components from different companies and then have them dicker with one another all the time, but I don’t have time for that”.  The credit union does not have time to effectively manage one of the most important and most capital intensive areas of their business. Gone are the days you open and staff a branch, and rely on members to come flocking through the door. The retail financial services sector is under attack on many fronts. Members/customers expect more. They expect 24/7 365 access to all banking products, services and transactions. What can be more important than developing and managing strategy to meet those expectations in a timely manner? Do not have time for it?

Regarding its new provider, the agreement stipulates that the credit union will not face any rate increases throughout the life of its contract. In addition, the credit union’s staff will also likely benefit from the new system’s enhanced core accounting functions – WOW no price increase until the credit union realizes it needs a new solution that they currently do not offer. Then what is the credit union’s choice, go back to the core vendor and hope they have the solution and will be fair in the price they charge (remember they need to make up that price guarantee somewhere) or …… oh I forgot, they do not want to dicker around with other solution providers. Price may be important, but can’t be the overriding reason a technology decision is made. I also love, “the staff will also “likely” benefit from the new accounting system.” At least a couple of back-office people will be happy.

It is the last statement that kills me.  “This whole idea of putting all your eggs in one basket can be an issue,” he says. “But I’ll take that over the alternative of integrating everything and managing different vendors.” – So expediency and lack of desire to manage vendors and relationship trumps or limits the credit union’s ability to define and deliver a comprehensive digital strategy.

The coup de grâce is “the go-live date for the new system is April 30, 2015, but that timeframe depends on the exit negotiations with Fiserv.” How familiar does that sound from the big-box core data processors, as they jump from one to another?

Unlike Ron Shevlin, (if you do not already, you should read his blogs, they are very entertaining) who loves skewer unsuspecting bloggers and article contributors, I bring this article to the forefront not because I want to attack the credit union CEO. I bring it forth as an example, because what was said by the  Four Points Federal Credit Union CEO is so typical of so many credit union and bank CEOs and executives.

I am not suggesting that all credit unions need to be as aggressive as BCU in managing its technology strategy, but I will say that they need to be on that side of the ledger. If you don’t control how your credit union digitally delivers its products, services and transactions, then you have little hope of formulating and executing a digital banking strategy that will satisfy your members/customers and allow you to compete/remain viable.    

Dinosaurs were once dominate creatures, but where are they now? Credit unions and banks that don’t face the rapidly changing realities of the retail financial services market face the same outcome.

Let’s look a little more closely at the performance these two credit unions as of June 2014.

	BCU – Peer Group 1B+	Four Points – Peer Group 100MM to 200MM
Member Growth	8.59%	-5.65%
Peer Group Member Growth	6.2%	-1.58%

Membership growth is generally seen as an indication of a credit union’s membership satisfaction and/or the credit union’s ability to meet the needs of their membership. Is BCU’s technology strategy, which is polar opposite of Four Points’ technology strategy, the reason BCU is exceeding their peer group in membership growth and Four Points is under performing compared to their peer group? I don’t know the answer, but it is a good question that deserves an answer.

Credit unions and banks must become more invested in their technology strategy and its execution. The CIO of today needs to be a savvy business leader that is actively involved in shaping the direction of the credit union, then putting in-place the solutions necessary to achieve the corporate goals.  The CIO of today needs to be like the orchestra conductor, pulling all the pieces together to create symphonic harmony. If you are lucky enough to have a CIO like Jeff Johnson at BCU consider yourself fortunate. They are hard to find and just may just hold the future success of your credit union in their hands.    

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!