It’s well known that core system replacement in midsized to large financial institutions can be expensive, potentially disruptive to operations, time- and labor-intensive, and risky. And for banks with wide geographical operations and those that have grown by M&A, core replacement can be especially challenging, since the heterogeneous and multi-vendor environments require abundant customization.
Daunted by the cost and complexity of a major core modernization project, many banks have been wrapping their core systems with new layers or making incremental changes. In fact, IDC's Global Technology and Industry Research Organization Survey found that core banking spending remains focused on upgrades and maintenance of existing solutions rather than complete replacement.
However, postponing major modernization is no longer an option for banks that need to remain relevant today and in the future, according to a new report from IDC Financial Insights that looks at current trends in core banking, "The Modular Reality of Core Banking Systems."
Says the report, the old approach of customization, adaptation, and patching is incapable of delivering long-term strategies. Instead, the future belongs to modular architecture -- component-based design with individual modules shared across product lines and processes using standardized exchange principles.
“The new trend in core banking is the unification of IT architecture,” notes the report. “Banks are demanding the consolidation of their IT solutions around fewer vendors, less customization, and universal interoperability of components. While there are potential cost implications arising from selecting multiple modules from a single vendor, additional flexibility and scalability will deliver greater competitive edge and allow banks to focus on products and customers.”
Pointing to the financial industry’s changing dynamic, report author Andrei Charniauski, research manager, Retail Banking, at IDC Financial Insights, notes that the ability to quickly launch new products, comply with regulations, and improve the overall customer experience requires banks to have increased agility facilitated by unifying IT architecture. However, Charniauski stresses that unifying the IT landscape in banking isn’t just about going back to monolithic solutions provided by a single vendor.
“Instead, it’s unifying in the sense that IT components should communicate with one another using standardized principles that effectively allow a dramatic reduction in customization and introduction of new modules, features, products, and interactions,” he tells us. “It’s not that the whole solution needs to be supplied by a single vendor. Standardized principles mean that various vendors can plug their modules into the core system for different system components.”
Acknowledging the trend toward component-based design and unifying IT architecture in core banking, financial services software vendors are beginning to develop solutions in component form. Financial services software vendor Misys, for instance, recently launched its FusionBanking Essence suite, a fully componentized solution that includes online, mobile, and personal financial management software products, explains Karen Johnson of global solutions sales, core banking, for Misys.
While large banks have historically been hesitant to change their core systems, banks may have to look to a new model in order to remain relevant and competitive.
“We’ve seen banks that don’t want to change. But without change, they will be stuck with old processes, and they will not be able to move quickly enough to capture new market opportunities. Other banks acknowledge they need to modernize their core systems, but they are going down the path of replacing like-for-like,” says Johnson. “Those banks will never achieve real transformation without re-thinking their processes and re-engineering them around the consumer."
Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio