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Why it's time to upgrade your core

…and 8 practical steps to guide you

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  • Written by  Juan Pedro Moreno
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  • Comments:   DISQUS_COMMENTS
 July 19, 2011

When it comes to modernizing their core systems, U.S. banks are no longer sitting on the sidelines. Several institutions—both large and small—are engaged in core upgrades at the moment, with more expected to follow.

Driven by the need to increase revenues and still manage costs, leading institutions are seizing the opportunity to start laying the technology groundwork for long-term competitive advantage. Research firm Aite Group recently estimated that approximately 20% of U.S. banks have reached a high level of urgency regarding replacing their core systems, and an additional 56% would benefit from a replacement.

Savvy banks realize that core modernization is no longer just about gaining cost efficiencies. Upgraded core systems enable banks to respond with more agility to new regulatory requirements, and facilitate faster product launches and a more personalized customer experience, which in turn, can yield much-needed growth.

With the economic recovery in low gear and banks grappling with waves of new regulations, revenues continue to be squeezed. According to the FDIC’s Quarterly Banking Profile for the first quarter of 2011, net operating revenue was 3.2% lower than a year earlier—only the second drop in the 27 years that such data has been kept, while total loans and lease balances fell 1.7%, the fifth largest decline on record.

To generate more sales per customer, banks must be able to innovate, by for instance, bundling multiple products together at favorable prices while increasing share of wallet. But few institutions have this ability because their creaky technology systems are simply not up to the task. That’s why core modernization has taken on new urgency. It’s time banks began to dismantle product silos and to embrace real-time processing capabilities.

Banks that choose to delay transforming their core systems today may come to regret their inaction two or three years from now when their competitors have completed their system modernizations and implemented new capabilities to drive revenues. Banks don’t want to be starting from scratch a few years down the road.
 
 
Before you take the plunge…
Getting on the path for a core transformation is not a decision to be taken lightly—it presents inherent operational and technological challenges. Before taking that path—in fact, before a core solution is even chosen—banks should take a series of quick, practical steps which can help position the modernization program for long-term success.
 
 
1. Audit existing systems and identify weaknesses. Some financial institutions, for example, run different platforms for related products. Thus, consumer loans run on a completely separate system from consumer deposits which, in turn, run on a separate platform from commercial deposits. The data is not integrated for these systems except on the back-end. Some larger banks may have multiple platforms for the same line of business across multiple regions.
 
 
2. Don’t pursue a lone-wolf strategy. Core upgrades can be large-scale and time-consuming, so obtaining buy-in from both the business and technology sides of the bank is critical. While a senior executive should spearhead the initiative, two senior managers—one from the technology unit and the other from the business unit—should articulate strategic goals and handle day-to-day responsibilities.


3. Determine the business strategy (short-, medium-, and long-term) that the upgraded core will support. Will the bank be offering new products and if so, what types? Does the bank intend to sell packaged products or bundles to retail customers? 
 
 
4. Gather critical data about the legacy technical environment in order to prepare the business case and request-for-proposal. This entails doing an assessment of existing legacy systems, defining the desired target-state environment, and determining which processes or applications will have to remain.
 
 
5. Don’t lose sight of the value of tactical victories while delivering a long-term vision. Focus on delivering benefits within the first three months to keep key stakeholders satisfied and to keep the program from being derailed by other projects. Examples of quick wins could include the creation of front-office sales tools that are linked to the core platform, or developing product bundling.
 
 
6. Include in the implementation plan a breakdown for how cost savings will be achieved, such as by decreasing the cost/income ratio. On the revenue side, be able to show how up-selling will increase.
 
 
7. Minimize customer service disruptions during the rollout. Institutions will want to avoid the onslaught of confused customers that one bank faced over several days following a systems-wide failure during a systems conversion which delayed customer deposits and overtaxed customer service phone lines. 
 
 
8. Set up a centralized project management office in order to track metrics to ensure that benefits are delivered as promised and within budget.

Without question, a core systems modernization program is a complex undertaking. Following the road map outlined here, however, can avoid headaches and save money, while increasing the likelihood of capturing the projected business benefits.

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