With all the buzz around mobile banking and its rapidly expanding array of services for bank customers, it’s easy to forget the elephant in the room: the aging core systems that lie at the heart of most banks’ operations and power basic transactions.
At some banks, core software can be 40 years old, and making changes to 40-year-old code in order to accommodate new features can be time-consuming and resource-intensive, to say the least.
Mobile banking is cool. Cores are … not cool. Banks are supposed to serve customers, and customers are clamoring for mobile features like remote deposit capture, not for modernized core systems. Customers don’t know what cores are or what state they’re in. Customers are happy, mobile is much cheaper to develop than clunky, complicated cores, so what’s in it for banks?
Plenty, says Kris Hansen, a managing director and vice president of the consulting business at Axxiome, which, in addition to consulting, does core replacement. “So much is done to work around the weakness of the core,” Hansen told Bank Innovation.
“Fixing your core is like eating your vegetables,” Hansen said. “So when you’re considering a new IT project, ask yourself, is this a salad or a donut?”
American banks lag behind international competition in core updates. Banks in Canada, Australia, and Europe have all invested far more heavily in core technology.
There is a lot holding back US banks in this regard, primarily the incredible complexity of core systems, which makes replacing them a massive project. “Cores have been built up through ‘incrementalism,’ bolting one piece here, another there,” said Hansen, describing the addition of features and capabilities to the core over the past half-century. Multiple vendors and sections of the IT department deal with different parts of the whole, resulting in siloed systems that develop independently and interact poorly with each other.
“Big banks can have 8,000 to 10,000 IT guys,” Hansen said. “Executives don’t see the complexity and IT guys hide it.” Or rather, “Executives see the complexity when they make a simple request, like adding an email address to a customer’s account information, and hear that it will cost $3.5 million and take 18 months.”
With databases this inflexible, it’s obvious that customer-experience-centered features such as CRM systems are onerous to implement at the core level, and consequently, service will suffer. With older cores, says Hansen, “the customer is just an attribute of the account.” This weakness leads to products such as Salesforce.com filling the gap.
One temptation when facing a lack of core capacity, according to Hansen, is to sidestep the problem by making needed changes in the cloud, where turnkey solutions are often available, and work can progress quickly. But this strategy, while tempting, can become yet another silo that will make the eventual work of integration that much harder later.
Working around the weakness of the core to develop, for example, mobile apps, results in “thick channels” — worlds in themselves with their own vendors, processes, and staffs. “A strong core thins out your channels, speeding up development down the line,” Hansen said. “Building a mobile app is relatively easy. It’s the integration to the core and security, that are painful.”
Work done in thick channels, to avoid the weakness of the core, results in “Frankenstein systems,” many separate parts bolted together that together can contain 20 or 30 different programming languages. A lot of resources — large staffs and multiple vendors — are needed to keep such systems going.
What will tip the scales to force banks to make the switch? “Efficiency will be the source of transformation,” Hansen said. “The biggest benefit will be a well-organized service tier.”
But what about real time transactions? Don’t customers want the peace of mind of knowing that funds that appear to be in their accounts as they look at their smartphone or tablet screens actually are? This is one of the big value propositions of modern core vendors. “Real time is too easy to fake,” Hansen said. “End users don’t know if it’s truly real time or not. You take on some risk. A lot of work is done to make things look like real time that are not.”
SMOKE AND MIRRORS
John Macaluso, SVP of market strategy for bank solutions for Fiserv, said, “There are things you can do with smoke and mirrors to make it look good. We can do that with legacy core platforms. But the difference is moving to the next generation consumer that demands real-time processing, 7-by-24 access, and wants to change their address over the phone.”
These customers will drive the change, Macaluso said. “There are few modern cores today. We’re on the cusp of change. Five years ago, the thought of streaming video on a phone was very remote. But now, who would buy a phone that doesn’t stream video? Customers are demanding more. Large banks will always be able to make it work by throwing money at the problem. But the guys in the middle [meaning midsize banks], they can’t just keep throwing Band-Aids at it.”
He described the services that are changing customer expectations. “You can go on iTunes at 2 a.m. The future consumer operates on the iTunes paradigm. They don’t care about proof of deposit. The pressure is coming from non-bank players.”
Macaluso also sticks up for the IT guys. “They’re often the ones who point out the problem. They say, ‘Look, we can’t go any further with this.'”
The discussion, according to Macaluso, needs to center on the ROI of updating core systems. “Look at the activity around account-opening. It can take two weeks and work from three people for one account. It’s a huge consumption of resources. You have to be able to embrace more customers. Automated account openings … that conversation around ROI is at the heart of everything we do now.”
ROI is a challenge when core updates are such massive projects with unflashy results. Hansen offered the following story.
A bank located outside the US decided to overhaul its core and spent five years and a considerable chunk of money doing so. Core systems and processes were modernized, silos were erased or vastly reduced, and clarity reigned over complexity. But the bank had focused so completely on its core transformation into 2012 that it had not developed a mobile app. But when executives decided to roll out mobile, Hansen said, “They did it in eight weeks.” Meanwhile, “banks with outdated cores and siloed development processes can have a 12-month delivery cycle for mobile.”
MORE THAN JUST SOFTWARE
Both Hansen and Macaluso point to something else: core transformation projects are about more than just software. They are about unsilo-ing the channel and product teams that now work independently — or even, as Brett King describes in Bank 3.0, in competition. This makes a big challenge even more daunting.
According to Macaluso’s analysis, the big banks can afford (literally) to wait, while the smaller banks cannot.
We know it’s the right thing to do upgrade bank cores. We’re just not seeing smaller banks rushing to do it right now. We asked Macaluso if he was. He said, “I’m hoping I’m seeing it.” If there’s a tipping point, we haven’t reached it yet. But when we reach it, will it be too late for small banks to get it done and compete?
It’s a big enough challenge getting executive support for new mobile initiatives. Sometimes those vegetables, as Hansen said, are just so bitter.