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Why ALL banks will change core systems

There's a theme that keeps cropping up at most conferences I attend around the remodelling
of banks.

It came up again today in a discussion about data leverage
at the Asian Banker Summit, and it occurred to me again recently, when I chaired the future focused day at IPS 2013.

The theme is how do you turn a vertically integrated
business that owns the customer process end-to-end and organises itself around
products and channels, into a horizontally structured business that wants to
provide functionality to the customer at their point of need and organises
themselves around the customer’s data.

That’s a long sentence and, for those who get this, it will
make perfect sense.

This is why I wouldn’t bother writing anything further, except
that this is so fundamental to the dialogue we’re having that I feel the need
to break it down step-by-step.

First, banks were created to look after all the financial
needs of people and businesses.

They were licenced to live in their own segregated world of operation,
and completely owned that piece of turf.

Everything from taking deposits to giving loans was the
banks domain, and they were organised to do just that.

As a result, most banks created operations based around products:
money transmissions, mortgages, cards, loans, insurances, etc.

These were delivered through one channel: the branch.

Over time, another channel appears: the direct sales
representative.  The sales folks resided
in branches and were served by the branch systems.

Then a new channel popped up: the call centre.

The call centre was like one massive remote branch, and
required a new structure to operate.  But
the underlying data could be delivered through the branch-based systems, so the
new structure was primarily designed to sit on top of those systems, offering
scripts into the various products the bank offered.

The call centre people struggled with this – sometimes operating
six or more windows of screens at any one time to get a competitive picture of the
customer’s needs – but they lived with it.

Then another channel popped up: the internet.

At first, banks thought this could lead to branch closures
and started to invest heavily in moving from branch to internet services.  However, the underlying data was still held
in product silos and the internet was not responsive to customer’s views of the
world.  Broadband was yet to appear, and customers
were reluctant to lose their branch connection.

So the banks left the internet as another layer on top of
the branch-based systems, alongside the call centre spaghetti.

Banks had become locked into vertically integrated
processes, structured around product silo’s and that were ill-suited to the multichannel
world they now served.

But it was ok.  Using
middleware, fudge, smoke and mirrors, it did the job.

Then this perfect storm of mobile, cloud and big data appeared, augmented by customers tweeting and socialising 24*7, and most banks
went …


Source: Shenzhen Stuff

Now here’s the challenge.

The bank cannot leverage data: it’s locked in product silos.

It cannot serve the customers' need: banks layered channels
over products, now they need to leverage data over mobile.

And banks lost the end-to-end process as customers moved to
apps, and pieces of process and functionality as needed.


Source: Jokeroo

Now there’s a need to organise the bank around the customer’s
data and then leverage that data through the cloud to mobile devices as apps.

No way.


There is a way.

The way is to completely rip out the old systems and replace
them with new core banking that can service the bank, and therefore the customers,
in the way that is needed for the 21st century.

How do you do that?

Changing core systems is like changing the engines on an aircraft
at 15,000 metres … you just don’t do it.

Well more and more banks are doing just that.

Some are having problems,
but this is why banks are changing core systems.

You cannot restructure a bank around customer data if you have
that data locked into heritage systems that are product silo’s and channel

‘Nuff said, more later.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Srini

    More and more banks are indeed considering replacing core banking systems – agree. In fact, the more ambitious the cost reduction and business integration plan, the more seriousness there is in these plans. For ex in a few organisations/ financial services orgs, they are really consider something called aplication right platforming, in which they would farm out the entire core infrastructure to an outside consortium and then receive back the service from this partner in a pay per use basis. If this is done, te extension to the applcations (aka the core banking appliation for instance) is just a step away. In countries like India, the Reserve Bank of India (Central bank) has come out with a directive to all the urban cooperative banks that unless they invest in (new) core banking systems, they will not receive approvals for branch expansion or new branch openings. Still old world way of talking branche, but the message is clear. And these banks are doing well thank you. Most of them are going the cloud way. With this mode, the vendor is able o ‘switch on’a basic core banking functionality for a branch in a week.

  • Completely agree Chris! Banks are facing increasing pressure to renew the infrastructure their operations are based upon, so they can gain a more accurate picture of their own operations and better know their customers in order to regain a foothold on the end-to-end customer process where new digital disruptors are stealing a march – and again meet the financial needs of their customers and the wider economy.
    Customers expect the same level of service from their banks as they do from their daily interactions with online retailers, supermarkets and mobile operators. The complex nature of banking services and the financial infrastructure that underpins banks’ operations, makes this an especially difficult challenge. As you mention, Banks must reorganise themselves around the customers data and more effectively leverage this data. To achieve this, there is a need to address the infrastructure – or plumbing – that allows this data to flow horizontally within and between financial institutions; infrastructure that is widely not fit for purpose.
    However, as you outline, the immediate rip and replace of this infrastructure carries with it a huge level of operational risk, along with a huge cost at a time of economic and regulatory uncertainty. There is a need to look at how the limitations of current infrastructure can be addressed on a longer term basis, the benefits of doing so and how both banks and the new regulators can better factor this into their longer term planning – for their mutual benefit and that of the economy.
    This is something Intellect is working to address through its Financial Infrastructure Programme (www.intellectuk.org/programmes/financial-services); which provides a neutral forum for all relevant parties – from banks, regulators, policy makers, academia and technology innovators – to discuss the ‘technological art of the possible’ in financial services, and provide the foundation for tangible outputs to drive the mutually beneficial evolution of the financial system.

  • Spot on Chris. Possibly the biggest toughest change programme in the world though?
    There are a few initiatives about which may help….EACHA http://www.eacha.org/ just kicked off an initaitive to figure out how the 22 ACH/CSMs in the Eurozone can collaborate to enable better banking services. IPFA http://www.ipf-a.org/ has been working to interlink ACHs globally. The Fed’s Remittances Coalition http://www.minneapolisfed.org/about/whatwedo/payments/Remittance_Coalition_Project_Overview.pdf has proposed new ISO20022 messages to support remittance information to be carried together with a payment. SEPA helps in the Eurozone, by forcing adoption of 20022. And, of course, new entrants are more readily able to build services which cut horizontally across traditional country-based silos. Of course today these are largely backoffice rather than customer-facing, but if the plumbing’s there, why not use it for other purposes?

  • Thanks, Chris. I doubt many would disagree with you. But what if banks could realize the benefits of a customer-centric approach WITHOUT replacing core systems?
    Zafin Labs’ miRevenue is transforming the way banks manage product, pricing and billing across product silos and lines of business. By acting as an innovation layer that wraps around and connects legacy systems, miRevenue empowers banks with the ability to bundle products and services based on a complete, 360-degree view of the customer relationship.

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