The Core Systems Dilemma

Jonathan Camhi also contributed to this story.

One of the major issues the banking industry is tackling is whether to upgrade or replace legacy core systems long past their sell-by date. As banks increasingly focus on getting a complete, cross-channel view of the customer, upgrading core systems technology is a vital part of that.

But as more banks pursue core replacements, they face a choice: Go with a "rip and replace" approach, which can carry more risk but offers more immediate benefits, or opt for what many see as the safer "evolutionary" approach of upgrading piece by piece. Both approaches have pros and cons, and which path makes sense for a bank depends on many factors.

Big Bang: Customer-Centricity Comes Faster

According to Bob Vokes, a partner at New York-based management consulting firm Novantas, the choice between a "big bang" approach to core replacement and a piecemeal one boils down to risk mitigation vs. business creation.

Bigger banks must keep in mind when considering a big bang approach their ability to effectively lock down the business while they do it, Vokes says, whereas a smaller institution needs to consider whether it's able to take on the risk associated with such a project. And while those risks are real -- "the road is littered with failures much more than successes," Vokes says -- there are also many benefits, too.

By completely replacing a core legacy system all at once, a bank gets closer to achieving a complete cross-channel view of the customer, Vokes says. "The benefit is having systems that can get you real-time feedback, seeing how the customer's position is changing, and how they interact with the bank in all the different channels," he adds.

Another important factor to consider when looking at the big bang approach is making sure there is executive and company-wide support for the project, says Eric Stine, senior VP of financial services for SAP America Inc., the New York-based arm of business software provider SAP. "It really is a cultural question," Stine says. "There needs to be an executive commitment and a grassroots commitment to making this change."

Stine also advises banks pursuing this approach to have a contingency plan in place in case the project is delayed, even if it costs more to do so. "With a single cutover, if one function gets delayed it all gets delayed," he says. "Money spent on temporary interfaces may seem like a throwaway, but the cost if the project is not delivered on time will be greater."

Stine also acknowledges that there are many institutions in the risk-averse banking industry that may shy away from this type of core conversion, despite the benefits.

"Given the current regulatory environment, the level of risk aversion in U.S. banks is higher than anywhere else in the world, and the progressive modernization approach is seen as lower risk," he says. "But even though these projects might be more risky, they allow you to accelerate the benefits" of having an updated core.

However, not all banks are as risk averse, says Don Trotta, senior VP and global head of financial services at SAP. In economies doing relatively well, such as Canada and Australia, banks have been more aggressive in putting in new systems, he says.

Also, he says the size of a bank matters. A large Tier 1 bank "is probably not going to do a rip-and-replace in one weekend," he notes. "But a smaller, highly integrated organization can be at a point where it makes sense."

Small Bank Advantage?

The big bang route may provide the most value to smaller banks looking at a core transformation, says Tom Berdan, VP of product management at Lake Mary, Fla.-based Harland Financial Solutions, whose clients include community banks. "It can be very costly for smaller banks if they try to deploy or manage multiple core systems over time," he says.

Coming out of a big bang core replacement, banks will benefit from moving from an account-based system to a customer-based one, Berdan says, because they won't have to look up multiple accounts to see how much a customer is worth to the institution. Also, he notes, doing a piecemeal or evolutionary replacement has the downside of creating a duplication of efforts during the migration from one system to another. "Running two systems for a period of time can be a burden on a bank's staff," he says.

Ultimately, what matters most for a bank considering the big bang approach is having the necessary project management and discipline, Berdan says. "It takes commitment from the bank's executive leadership team," he adds.

Whether a bank chooses to go big bang for a core replacement also depends on whether it's looking at a best-of-breed approach to its core systems or a fully integrated, single-vendor solution, says Joe Reilly, executive VP and CIO of Zions Bancorporation ($53.4 billion in assets) in Salt Lake City. A bank with a best-of-breed core system would find it extremely difficult, if not impossible, to go with a big bang replacement, he contends.

Like Berdan, Reilly believes the big bang approach may be best suited for smaller banks with fewer systems to be concerned about. "Smaller institutions running an integrated 'bank-in-a-box' system can do a cutover over one weekend," he says. "But the larger and more complex the bank is, the more you have to think about how you're going to mitigate risk."

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio

1 of 3