Japanese Banks Ink Deal With IBM

Four regional banks in Japan plan to outsource fundamental components of their IT infrastructures to IBM Japan, using core systems from Bank of Tokyo-Mitsubishi as a starting point.

Over the next three years, a new subsidiary of IBM Japan will create a shared regional bank system having sufficient flexibility to accommodate the specific needs of the four initial participants: Ashikaga Bank, Hyakujushi Bank, Juroku Bank and Joyo Bank. Each of these regional banks has entered into a software license agreement with Bank of Tokyo-Mitsubishi and an outsourcing agreement with IBM Japan. Bank of Tokyo-Mitsubishi intends to seek new regional bank licensees to bring onto the new platform.

"A shared regional bank system infrastructure and outsourcing are effective methods for banks to ensure and maintain flexibility in business management while improving their economical efficiency and effectively capturing new business opportunities in the on-demand era," said Masayuki Tanaka, managing director of Bank of Tokyo-Mitsubishi, Ltd., in a press release. "The participating banks will be able to focus on building closer ties with customers, enhancing their present customer services and creating unique offerings to further strengthen their competitiveness."

The switchover, scheduled for 2007, will take several months as each bank in turn is brought onto the new system. The banks will form a joint venture in 2006 to oversee the transition.

Development on the shared regional bank system will start with deposits, loans and foreign exchange systems. Following that, the scope of the project will be expanded to include several other common systems, including customer service functions and a shared SWIFTNet hub. In addition, the participating banks will have the opportunity to transfer their own applications to the IBM Japan venture.

By adopting IBM's on-demand computing model, the regional banks involved will be able to focus on their core competencies, move fixed overhead to variable costs, increase responsiveness, and achieve greater resiliency, said Mark Greene, general manager of global banking for IBM.

But it won't require a huge up-front expenditure. In fact, part of the initial financing comes from cost avoidance involved with items such as business continuity planning. Indeed, disaster recovery becomes part of the architecture under the utility computing model. "It precludes the bank from having to build out its own disaster preparedness center, and it can begin to use this single utility as a built in back-up," said Greene. "Instead of each bank going out and building a separate facility, they get what they need by pooling their resources."

The multi-bank venture led by Bank of Tokyo-Mitsubishi stands in contrast to other outsourcing deals between a single institution and a single technology provider, such as those between IBM and both Deutsche Bank and JPMorgan Chase. "IBM has the ability to share and pool resources across those various customers, but there's certainly no formal collaboration between those customers running a shared service," said Greene. "This is a very different business model."

But even if it doesn't involve a large U.S. bank licensing its infrastructure to smaller players, a version of the multi-bank model may appeal to certain institutions, said Greene. "We'll see similar partnerships show up in the U.S. among the so-called Tier 2 banks," he said. "There's room for plenty of applications and cost synergies among the medium-sized banks."

"We may see action there before we see formal partnering among the largest banks," added Greene.