Sticking With the Tried and True

The days when large U.S. banks could sustain their old core systems on the IT version of life support are numbered, according to TowerGroup (Needham, Mass.). "Banks have built a rather complex set of middleware to overcome the limitations [of their core systems]," explains TowerGroup senior analyst Robert Hunt. But, he predicts, as the demand for real-time or near real-time transactions heats up and the industry drifts toward more customer centricity, banks "will absolutely have to replace them. It may not happen now or next year, but it will need to happen soon."

In a recent report, Hunt notes that many large domestic financial institutions (defined as those with $80 billion in assets or more) have no immediate plans to upgrade their core banking systems. Rather, he relates, large banks usually take a line-of-business approach to upgrading their IT and have come up with ways in which to squeeze more life out of their legacy systems. "What [banks] have done has gotten them a lot of extra years, but at some point they just won't be able to keep this up," Hunt says.

The situation with core systems is different overseas, however. In Europe, cross-border mergers are prompting banks there to replace their systems. And, "In Asia, it seems like everyone's putting in new core banking systems," Hunt remarks. "The top six Indian banks have core system replacements under way." He says these banks do not have the same investment in legacy systems as do more-established U.S. banks.

According to Hunt, the sheer size of the major U.S. banks makes the prospect of overhauling their IT almost dizzying. "It's a three- to five-year project to replace your core systems and will probably cost around $100 million," he says. But banks that install new systems realize significant cost savings in the long run, as well as faster time to market and better overall service and operational efficiency, Hunt asserts.

Hunt says the big players in the U.S. financial services sector should drop the best-of-breed approach and go with single vendor solutions. The single vendor approach provides users with reduced software maintenance costs, more-sophisticated relationship products and the ability to implement products faster, he contends.