Tuesday, 16 September 2014

Have European banks given up on core banking system replacements?

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Despite the emergence of new technology and increasing competition, it seems the replacement of core banking systems is not on the agenda for European banks. Instead, banks are investing in niche IT projects to not only maintain their existing systems, but to introduce incremental changes, which can provide a quick return on investment (ROI) and meet their business and consumer needs.

This approach reflects an industry that is in a ‘holding pattern’, says Simon Gregson, talking about IBM’s recent Attitudes to Core Banking Transformation in Europe report which he co-wrote, with many banks in Europe merely coping with the most urgent change requirements but failing to address the long-term needs. In its report, IBM questioned IT heads at 27 European Banks, the majority of which were in Western Europe. It revealed that budgets are tight but adequate for incremental improvement, so most banks are engaged in investments for which payback is expected in the same year, Gregson comments. These are driven by front-office digitisation, regulatory requirements, cost reduction and operational development. It can be argued that this approach is the right thing for banks to do in the current economic climate, but it leaves them vulnerable to loss of business from more agile entrants to the market.

So why are European banks not contemplating complete replacements of their core banking systems? The list of reasons is endless, but some of the main points include the cost of the project (at least £500 million for a tier one or two bank), the time it takes to undergo a transformation, the complexity of the task of moving from legacy systems, interfaces and system interdependencies to a new architecture, and the risk associated with doing this. In addition, many core replacements have failed and most have taken much longer, and have cost far more, than banks initially anticipated.

The most recent high-profile failed overhaul was at the UK’s troubled Co-operative Bank. The bank started a project in 2006 to replace its core banking system with Infosys’ Finacle, but was forced to scrap it in 2013 and to ultimately write down a sum of £349 million. The problems with the project stemmed from the bank’s merger with Britannia Building Society in 2009, which increased the scope and complexity of the transformation. The Co-op had also hoped to move Britannia onto Finacle as part of the roll-out, but a string of management changes, lack of supervision, as well as cultural differences between the two institutions quashed a successful outcome. The final hurdle was when the bank’s plan to acquire 632 branches of Lloyds Bank for £732 million, and outsource the Co-op's technology infrastructure to Lloyds, failed to materialise. Shortly after that the bank pulled the plug on the Finacle deployment.

Although the world's largest building society, Nationwide, has made strides in overhauling its legacy technology, this project too has been plagued with difficulties. In 2008, the society embarked on a £1.5 billion modernisation project, a key part of which is the £300 million Voyager business transformation programme that involves the replacement of Nationwide’s existing Unisys platform with SAP’s core banking solution. It has been a drawn out and painful process, with the budget more than doubling and the initial five-year project becoming an eight-year one for a variety of reasons, including the need for heavy customisation. Nationwide says the aim is to switch off its old platform by 2015, but this might be a long shot. Being a customer myself, I can tell you that the system is not what it’s hyped up to be, with paper forms and branch visits remaining the only option for some services.

Many players in the industry are awaiting the emergence of more cloud-based solutions, but Gregson does not think this is the answer to more core banking replacements as ‘banks are not yet actively thinking about cloud for core banking transformation’. Cloud computing should be one of the main drivers for such a transformation as the services are easier to use, easier to connect to and cheaper to run, he comments. However, European banks are yet to show much interest in cloud platforms as a means of delivering their core services due to a combination of security and regulatory uncertainty.

We at IBS are eagerly awaiting the annual IBS Sales League Table results, which will be released in March 2015, to see whether the banking industry in Europe and elsewhere will open up to more core banking replacements or stick to short-term, tactical IT changes.

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