BANKING INFORMATION SYSTEMS LECTURE 7

Core banking system Definition: •  They are applications responsible for processing and posting transactions in the domains of payments, current and saving accounts, loans and securities. •  Today’s solutions are capable of completing these tasks in an integrated, browser-based environment across multiple delivery channels.

Core banking system •  Experts consider core banking replacement to be the most complex, risky and expensive IT project that any bank can undertake. •  A core banking system forms the backbone of a bank’s IT infrastructure and contains records of all customer transactions and the processing of those transactions. •  A minor error in this area can cause a bank’s entire system to crash, tarnishing its reputation in the process.

Core banking system •  Technology is a key driver of change: flexible development, speed to market, real-time processing and a single view of the customer across all lines of business. •  Many of the largest institutions are still battling with the self-imposed handicap of old- fashioned, outmoded and inadequate core systems. •  Two factors stand in the way: risk and cost in carrying out a core banking replacement.

CBS Risks • The costs as well as the risks are high, but the benefits are far greater. • Financial institutions that have already announced plans to undertake such projects, will quickly reap the benefits and set an example for others in the industry       • They will benefit: Greater efficiency Easier access to information The ability to add new applications without the fear of system crashes

CBS Costs •  The project budgets required for software and service are huge: up to € 250 million in extreme cases.

Core Banking Market •  A Forrester research study in October 2005 stated that banks are racing to renew their banking platforms. •  46% of European banks had already started to renew their application, 23% planned to do so.

Core Banking Market •  Most of the top-tier banks in Europe are now busy replacing their legacy systems with a single global system. •  Contrary to Europe, the US market, in which large banks in particular are still reluctant to proceed. •  In Australia, the big four started to select and replace the old systems, and the same applies to Russia.

CBS Clients 1.   Retail Banking 2.   Commercial Banking 3.   Others

CBS Clients Retail Banking •  The most important issues in top-tier retail banks are volume handling and mass products. •  Ability to manage large volumes of data is the main challenge for core banking software. •  Only recently, packaged solutions have become available which have overcome the technical challenges in replacing the 30-year- old legacy solutions that are predominant in the hearts of the top- tier banks. •  Retail banking represents the most significant source of income for the global financial services industry. •  The key differentiator between market leaders and poor performers will be profitable growth rather than cost cut- ting to improve profits in the long run.

Findings •  Banks feel increasingly limited by the capabilities of their existing core banking systems. lack of flexibility in banks’ current core processing applications Technology influencers are still dominated by cost considerations Complexity of implementation

CBS Clients 2. Commercial Banking •  The core banking market for commercial banking is not as large and as fast-changing as the core banking market for retail banking. 3. Others •  There are some other interesting developments regarding core banking solutions: e.g. Finance departments/ subsidiaries of car companies often choose core banking solutions for their finance activities.

Core Banking Domains 1. Payments and Cash Management 2. Savings 3.   Loans and Mortgages 4.   Securities

Recent Developments in Packaged Solutions •  The core banking systems area is becoming more mature with packaged solutions increasingly attaining a functional richness that was previously available only from in-house legacy solutions. •  They are also attaining a technical and organizational level that meets the business expectations in terms of time to market and operational support.

Recent Developments - Technology •  There has been a move away from dependencies on hardware platforms and operating systems. •  The vendor offerings have access to a larger marketplace. •  This has given banks access to a much larger set of vendors and solutions.

Recent Developments - Technology •  Banks can operate core banking systems on their platform of preference. •  Some banks prefer to stay on their well-embedded and reliable mainframe infrastructure. •  Others move to highly scalable commodity platforms.

Market Future •  In the past, there were a large number of specialized solutions in the market. •  Some were strong in account handling, others strong in commercial or retail lending and finally there were separate financial accounting solutions.

Market Future • Nowadays there seems to be a move towards alignment with the frameworks of the ERP giants SAP and Oracle in this market. •  This should deliver the additional benefits promised in some of the initiatives of these ERP giants: -  Embedded business intelligence -  Integrated customer relationship management -  Integrated financial accounting and reporting -  Integrated risk management -  Regulatory compliance -  Fraud detection

Package Based Solutions Make or Buy Selection Implementation Operation •  The four main phases are:

Package Based Solutions Make or Buy Selection Implementation Operation

Phase 1: Make or Buy •  A major consideration for banks with a demand for system replacement is whether to build it in-house or buy an off-the-shelf package. •  Most large banks have until recently preferred the in- house route, on the basis that core banking systems are responsible for the most critical tasks of bank operations and require complete and ultimate control by the bank. •  Therefore, they did not want to rely on vendor solutions for managing accounts and processing transactions.

Core Banking Systems Options 1. Do nothing but continue the normal maintenance on the current system(s). -  For the old legacy systems this means maintenance costs and risks will increase significantly as time passes, so another decision will normally have to be made in the next few years. 2. Develop a new system in-house. -  Although cost and risk may well rule this out, this is still the biggest competitor, mostly because of the influence of the IT department, and from the end-user perspective the number of changes will be limited.

Core Banking Systems Options 3. Obtain a packaged solution. -  The challenge of this option is to find a packaged solution that is suitably scalable and that will integrate into the bank’s technical environment. -  Plug-and-play packaged solutions provide flexibility in product development and deployment and enable lower cost development through buying commoditized development services from third-party suppliers. -  Changes in the current processes are unavoidable in order to benefit from the strengths of a packaged solution. -  Choosing a packaged solution makes it possible to take advantage of functionalities developed for other banks. This makes it possible to benefit from these functionalities within short timeframes.

Core Banking Systems Options 4. Outsource the service. -  The challenges of this option are to integrate with and manage such a service. -  Outsourcing can be based on the company’s own solution or a (new) package. -  The size of the bank is likely to influence which option is preferable.