Banks Worldwide Plan to Overhaul Aging Core Banking Systems

Seventy percent of bank executives surveyed said flexibility was the biggest problem hindering the success of their core banking systems. Almost half of the bank executives surveyed also cited high maintenance costs and lack of system integration as areas that would impede their ability to remain competitive. To address these concerns, a significant number of banks surveyed are planning core banking system replacements within the next five years – 30 percent in Europe, more than 35 percent in Asia Pacific and more than 20 percent in North America. “Regardless of geography, core banking system maintenance is the albatross in banks’ IT departments,” said Octavio Marenzi, CEO, Celent. “Fierce competitive dynamics and the necessity to keep pace with new products and to strengthen customer relationships will motivate banks to significantly rethink and revamp their IT architecture over the next decade.”
SAP and Accenture entered into an alliance in the Financial Services industry in 2003 and recently co-sponsored the study, titled “Redefining Core Banking,” to examine the current status, impact and plans for transformation of core banking systems. The comprehensive global study is one of the first to gather the views of high-level bank business and information technology (IT) executives, as well as branch-level employees, who are the primary users of core banking systems. Nearly 1,500 bankers around the world participated in the study, with 43 of the top 100 banks represented. The survey included banks of all sizes in Europe (40 percent), Asia Pacific (30 percent) and North America (30 percent). For the purposes of the study, core banking was defined as the sum of all IT components allowing banks to manage basic financial products and services, including data on clients, deposit accounts, loans, mortgages, payment transactions and credit cards.
Core system issues resonate with branch employees. Throughout the branch survey, this group identified the day-to-day issues they face using old systems that affect their customer interactions. These include:

  • Branch employees said they spend nearly 40 percent of their days working on customer-related back-office activities rather than on customer-facing activities. Branch employees in Asia Pacific indicated that they spend 48 percent of their time on back-office activities. In North American and European banks, employees also spend a significant amount of time on back-office activities: 36 percent and 34 percent, respectively.
  • Branch employees agreed that response time (38 percent) and integration of different applications (38 percent) ranked highest on the list of areas needing improvement. Response time was of particular concern in Europe (50 percent), while integration of different applications was the primary concern in Asia Pacific (41 percent) and North America (38 percent).
  • Fifty percent of branch employees agreed that frequent and unwanted delays were the most common processing issues. Other processing issues included inconsistent customer data and not understanding customer needs.
  • Views on the best ways to increase business with existing customers differed worldwide. Fifty-four percent of respondents from Asia Pacific said the way to increase business with existing customers was to better understand those customers’ needs. By comparison, 55 percent of respondents in Europe and 41 percent in North America said they needed more time with the customer.

Global need for flexibility and desire for integration

Executives surveyed indicated two major reasons their systems are inflexible: old systems built on what they considered to be the wrong technology for future growth and systems that have been customized over time, resulting in complex systems resistant to change and expensive to maintain. With branch employees worldwide spending more than 40 percent of their time on back-office activities, the survey identified not only problems of banking executives, but also the challenges faced during the day-to-day activities of branch employees.
“This survey points to the need for leading banks to simplify their internal operations, equipping themselves with core systems that use flexible, robust, future-oriented IT architecture that is service-oriented,” said Jean-Marc Ollagnier, global managing partner of Accenture’s Financial Services Solutions group. “This component approach, replacing unnecessarily complex IT systems, can allow for more optimal IT alignment with the business-operating model and can allow for future flexibility in sourcing decisions.”
Another significant finding of the survey was that business executives and IT executives differed in their expectations of the value a core banking system needs to bring to a bank. Thirty-nine percent of business executives want a system focused on product innovation, while IT respondents primarily want a system that reduces expenses (40 percent).

Cost issues

Not surprisingly, virtually half of the executive respondents cited cost as a major concern with their core banking systems. The survey found that banks spend half of their entire IT budgets on core systems. A large portion of this spending is for development work to write new product functionality or system features into the core systems. In the Asia-Pacific region, banks typically spend 70 percent of core systems budgets on maintaining their core systems.
“Banks worldwide need to ‘future proof’ their core systems to with a flexible environment that can help them adapt and respond to unseen future changes and advancements in the industry,” said Thomas Balgheim, senior vice president of financial services, SAP AG. “The banking industry has entered the age of industrialization, similar to the shift manufacturers have made in years past. The benefits gained by modern core banking systems can help banks to save money, re-focus their employees back on their customers and provide customers with the products and pricing that meet their needs.”

Achieving system renewal

A very high proportion of IT executives surveyed said they considered a componentized, service-oriented architecture to be a key feature of their target IT states. Although respondents provided a range of responses about their intended target architecture, few have technology road maps in place. However, the majority of banks surveyed have strong opinions about how they would move toward their target core banking systems. Forty-nine percent of IT executives and 50 percent of business executives said they would move to their target systems by product line; the second choice of IT and business executives was by functional area (28 percent and 29 percent respectively).

Source: SAP AG