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w w w . t h e a s i a n b a n k e r . c o m
Management Report:
Roadmap to SuccessfulCore Banking System Replacement
Critical Success Factor s and Best Practices
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Neeti Aggarwal, CFA
Published September 2006©2006 The Asian Banker
Management Report:
Roadmap to Successful
Core Banking System ReplacementCritical Success Factors and Best Practices
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IMPORTANT NOTICE Although the author and publisher have tried to provide information
as accurately as possible, they accept no responsibility for any loss,
injury or inconveniences suffered by any person using this document.
The author and publisher have taken all reasonable care to ensure
the data and information in this report is accurate and presents a fair
representation of the subject matter.
First Publication: 15 September 2006
ISBN: 981-05-6643-3
© 2006 The Asian Banker. All rights reserved
The Asian Banker, incorporated in Singapore as T.A.B. International Pte Ltd, claims all rights as owner of
intellectual property in this report. No part of this document may be reproduced, stored in a retrieval system or
transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without
the written permission of the publisher and the copyright owner.
PORTANT NOTICE
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ABOUT THE ASIAN BANKER Asia’s financial service landscape is undergoing tremendous change and evolution.Liberalisation, consolidation and rapid technological advances have opened uptremendous opportunities for financial institutions and, it is vital for banks to benchmarkthemselves against their competitors and to keep abreast of global developments.
Decision-makers need accurate, incisive, timely and continuous information to bring theirorganisation to the next level, meet competitive challenges successfully and managetheir own future. The Asian Banker has long recognised the importance of information asa strategic management and decision-making tool and is positioned to provide banks and
partner organisations useful, crucial and timely business intelligence.
The Asian Banker achieves this through three synergistic services:
As ian Banker Research: current , cont inuous and in-depth research on bestpractices and market developments and trends
Proprietary & generic research services
Subscription-based research support services for different programs
As ian Banker Publicat ions: incisive news and in formation on transformationalissues
The Asian Banker Journal
Asian Banker E-newsletters on different segments in the financial services industrysuch as operations & technology, wealth management, CRM, retail distribution and
payment systems amongst others Annual Publication: The CEO Collection; The Asian Banker 300 Banks Ranking
Special Reports on M&A; Internet Banking; Payments Systems; Retail Banking;CRM; Risk Management; Wealth Management and Operations & Technology
As ian Banker Forums: exc lusive gather ing of industry leaders and sen ior dec is ionmakers to network and exchange information
Annual Major Conferences
The Asian Banker Summit
The Future of Banking in China
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Roundtable Series / Consultative Forums
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Contact:
THE ASIAN BANKER
10 Hoe Chiang Road#14-06 Keppel Tower Singapore 0899315Tel: (65) 6236 6500Fax: (65) 6236 6530http://www.theasianbanker.com
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ABOUT THE ASIAN BANKER
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ACKNOWLEDGEMENTWe would like to convey our sincere thanks to Mr Hubert Knapp for sparing his
valuable time and providing us with important insights into core banking systems for
the preparation of this report.
Mr Knapp is one of our International Resource Directors. He is currently a Managing
Partner in Immacon Pte Ltd and holds a dual responsibility as Executive Partner in
Motif Technologies Bangkok.
Mr Knapp has 25 years of experience in the financial services industry. He specialises
in core banking enabled change, business transformation, credit risk management
and strategy development. His career in banking and consulting covers assignments
in Germany, United Kingdom, Switzerland, Turkey, Nepal, Sri Lanka, ASEAN and
many other parts of the world.
He has managed retail and wholesale banking operations for major global banks
in Europe and Asia. After his stint as Deputy General Manager of a joint-venture
merchant bank in Indonesia, his interest turned to financial services consulting. His
consulting assignments constitute a highly diversified portfolio that includes some of
the largest commercial banks in Asia.
CKNOWLEDGEMENT
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Core BankingTransformationCritical Success Factors and Best Practices
Table of Contents
1. Core Banking Trends in Asia Pacific
Market Trends
1.1 Prominent recent deals in the region
1.2 Geographic dispersion of deals in recent years and 2006
estimates
1.3 Activity within countries and their vendor preferences
1.4 Estimates of system and software spending in Asia
Pacific
Technical Trends
1.5 Evolution and convergence of core banking systems
1.6 Technology integration in Asian countries
1.7 Trends in platform usage among Asian countries
1.8 Trends in deployment approach
2. Bankers’ Perception Survey on Core Banking System
Selection
2.1 Survey results on key reasons for replacement
2.2 Survey results on factors considered in system selection
2.3 UNIX versus mainframe – survey results on
considerations in system selection
3. Core Banking System – An Overview
3.1 Core banking system – an introduction and definition
3.1.1 Definition of core banking system
3.1.2 What to expect in core banking replacement
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3.1.3 Rationale for front-end systems replacement
3.2 Overview of the core banking system replacement
project
3.3 Approaches to replacement
4. Phases of Core Banking Replacement and Critical
Considerations
4.1 Phases of core banking replacement – an overview
4.2 Timeline of replacement project stages
4.3 Phase 1 – Business justification and blueprint
4.3.1 Developing business objectives
4.3.2 Delta methodology – assessing future requirements
4.4 Phase 2 – Selection
4.4.1 Reasons for replacement
4.4.2 Considerations in determining selection criteria
4.4.3 Key considerations in vendor selection
4.4.4 The right architecture and platform
4.4.5 Selection process
4.5 Phase 3 – Implementation
4.5.1 Key challenges and critical success factors
4.5.2 Implementation process
4.6 Phase 4 – Deployment
4.6.1 Deployment process
4.6.2 Deployment approaches
4.7 Risk mitigation
4.8 Financial implications
5. Core Banking Replacement Building Blocks
5.1 Application architecture and core banking
5.1.1 Key issues
5.1.2 Deployment strategy
5.2 Service oriented architecture
5.3 Interface considerations
5.4 Coexistence
ble of Con tents
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Table of Con tents
5.4.1 Branches
5.4.2 Call centres
5.4.3 ATM transactions
5.4.4 Other online interfaces
5.4.5 Batch interfaces – inward clearing
5.4.6 Batch interfaces – outward clearing
5.4.7 Other transaction implications
5.5 Data conversion and data cleansing5.6 Product rationalisation
5.7 Process rationalisation
6. Critical Success Factors and Best Practices
6.1 Project organisation and programme management
6.1.1 Stage 1 project organisation
6.1.2 Stage 2 project organisation
6.1.3 Stage 3 project organisation
6.2 Critical success factors and best practices in system
selection
6.3 Critical success factors and best practices in vendor
selection
6.4 Best practices for vendors (for successful
implementation)
7. Unique Core Banking Replacement Considerations
7.1 A large multinational bank
7.2 A small commercial bank
7.3 An Islamic bank
7.4 “Internet only” banks
7.5 Mergers and acquisitions of banks
8. Country Trend Analyses
8.1 India
8.2 China
8.3 Japan, Korea and Taiwan
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8.4 South East Asia – Indonesia, Malaysia, Thailand and
Singapore
9. Vendor Assessment
9.1 Vendor and product assessment
9.2 Market positioning
10. Conclusions10.1 Conclusion 1 – for bankers
10.2 Conclusion 2 – for vendors
A1. Appendix I – Case Studies
A1.1. State bank of India
A1.2 Union bank of Philippines
A1. Appendix II – An Average Request for Proposal
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Executive Summary
Increasing consumer demands, high costs and widespread dissatisfaction
with ageing systems are making it increasingly dif ficult for Asian bankers
to put off decisions to replace their core banking systems. We feel that the
banking industry worldwide is nearing a time when replacing core banking
systems would be a necessity rather than an option. However the complexity
of the task is such that it is often compared to a heart transplant, involving
huge risks, high costs and substantial time and human resources.
The critical need for replacement stems from rising customer expectations
and existing technical limitations. Banks are finding it imperative to expand
their channels and services while managing operational and technical costs
even as margins are shrinking due to stiff competition. But this is hampered
by technical limitations as many traditional financial institutions are shackled
by a series of heavily siloed non-integrated back-of fice legacy systems in
which customer information resides in multiple and unconnected locations.
Attempts to integrate these through layers of middleware have just made the
structure more complicated in many cases. On the other hand, abandoning the
antiquated structure itself presents a major challenge from the organisation
and financial perspectives. But competitive pressures are forcing banks
to take speedy actions, as can be seen in our analysis of trends in Asian
markets.
Analysing the Asian markets and the recent core banking replacement
decisions, we found that there has been a gradual rise in the number of core
banking deals in the last two years. Interestingly, almost half of the deals
during this period have come from state-owned Indian banks. These banks
had faltered due to competitive pressure from private banks and have found
it imperative to purchase (in most cases for the first time) new core banking
systems and upgrade themselves technically to improve product innovation,
agility in decision making and cost effectiveness. We expect the Asia-widetrend to continue in the year 2006; but as the Indian market nears saturation,
there are likely to be fewer deals from this country in the following years.
Looking at the trend in countries that have first-generation technical
sophistication, we have discovered that core banking replacement is
considered a cyclical industry as banks come to the market about every 15
years to replace an ageing system and improve their ef ficiencies. In the last
two years, many banks in countries like China, Taiwan and Malaysia have
shown initial signs of awakening to the need for technical advancement. We
expect to see increasing activity in China with foreign banks getting full access
to the sector in 2007 under WTO stipulations and with China’s hosting of the
Execut ive Summary
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Olympics in 2008. On the other hand, we have found that banks in countries
like Japan and Indonesia are still mulling over the wisdom of replacing.
Once a bank has decided to replace its system, it embarks on a complex
process involving a series of critical choices. To start with, the bank has
to decide on the most appropriate approach to system replacement. The
choices vary with the availability of technical skills, complexity of the project,
availability of products and costs involved. As banks weigh their options,
they often have to consider the pros and cons of “buying” versus “building”
and “purchasing” versus “outsourcing”. We have discovered that most Asian
banks increasingly prefer to focus on their core business rather than lock
their resources in building a system and there is a distinct trend towards
the purchase of packaged solutions. However for large multinational banks,
a ready packaged solution often does not meet the complex requirements
and hence may require further development (as in the case of HSBC) or
substantial customisation at the minimum.
To better comprehend the complicated process of core banking replacement,
we begin with a definition of the core banking system. We define it as a
highly ef ficient “customer accounting” and transaction processing engine, for
high volumes of back-of fice transactions and customer-level accounting and
reporting of the deposit and loan products processed in the bank. Howeverit does not include the front of fice. Thus we believe that the bank has to
first determine whether it really needs to replace its core system or it can
manage with just front-of fice replacement. In many cases, it is likely that the
bank needs to replace both along with the general ledger – which would be
a project of even bigger magnitude. If the bank has to change both front end
and core banking, we recommend it be done through the same vendor to
avoid integration issues.
Our research shows that banks which go ahead with replacement should
make a clear transition from their legacy system to the new system. Partially
bringing old elements such as codes, process automation and loss-making
legacy products into the new environment will lead to sub-optimal returns.
We have divided the process of core banking replacement into four phases.
The first phase is business justification and identification of business
requirements through delta analysis. We believe that the bank should, first
and foremost, determine its long-term strategic goals as these would guide
the bank towards the critical requirements for its system. With the business
objectives in mind, banks need to analyse the capabilities and deficiencies
of their existing core banking system to determine the new system’s
requirements – yet during our research, we discovered that only 70% of the
banks in our sample do so. In addition to setting the objectives, the bank
should establish the business and financial justification for the project at this
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early stage of the process.
The second phase of the project is selection of the system and the vendor.
Selection of a core banking system will affect not only the growth andfinancials
of the organisation but also its viability and competitiveness. Hence banks
need to critically evaluate all available options and select the system that
provides the right DNA (the architecture) to meet its business and strategic
requirements. We believe that the selection process should involve business
representatives from all functional divisions owing to the pervasive nature
of these systems within the organisation. Viewing the project as just an IT
project would be a recipe for failure.
The selection process begins with the issuance of a Request for Proposal
to various vendors. Each of the bids is assessed on both qualitative and
quantitative terms across a matrix of selection criteria. The critical requirements
from a new system are flexibility and scalability to cater to future growth. We
advise banks to ensure that with the new system, they are not simply shifting
to a bigger box which may become a constraint again in a few years’ time,
as this would defeat the whole purpose of replacing the system. Equally
important is that banks should not be enamoured with “bells” and “whistles”
(which are more often than not the front-end features) and should look for
a system that has the requisite processing power rather than just a userfriendly front-end screen.
We have discovered that one of the challenges is picturing the banking
landscape in years to come due to the rapid pace of change in the banking
business. Thus the right selection would be one with a forward-looking
flexible architecture that has the ability to support the business ambitions of
the bank and allows for future modifications with ease. This can come from
Service Oriented Architecture (SOA). SOA is a relatively recent development
which, in its purest sense, is centred on loosely coupled components which
support generic services and are based on web technology. In a core banking
context, it essentially means reducing barriers in antiquated infrastructure and
creating real-time integration of disparate systems and sharing of databases
on a flexible and easily upgradeable infrastructure. We advise banks to look
for a system that has the flexibility of SOA and to integrate their systems and
components in an SOA-based framework within the bank.
Banks need to select not the “best” system available but the one that is most
appropriate for their particular requirements. Different banks and their unique
requirements are discussed in section 8.
Equally critical is selecting the right vendor. We believe that it is imperative
for banks to consider vendors as long-term partners in growth in today’s
fast-paced environment. The critical vendor assessment criteria include trust
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in the vendor’s ability to meet the business objectives (through optimum
customisation and localisation of the product) as well as the vendor’s
reliability, implementation capabilities and financial strength. Vendors that
have a track record of providing international-quality products while meeting
the local needs of banks are more likely to achieve long-term success. The
mix of product and services coupled with pricing are critical considerations.
We have rated leading vendors in Asian markets based on our assessment
and a survey done among bankers – this is discussed in our section on
vendor assessment.
Platform choice is one other critical factor in selection. While mainframe
remains unbeaten in its robustness and stability, UNIX-based systems are
becoming more popular. We have discovered that banks in Asian countries
are increasingly shifting towards the more agile and flexible UNIX systems,
which are perceived to have lower operational and maintenance costs. While
this is true for banks that have lower transaction volumes, it may not be so
for large retail banks. We believe that mainframes continue to have a distinct
advantage in terms of stability and scalability. Hence for mission critical
projects, mainframes would still be preferred for their reliability. However for
small banks (and those banks that are acquiring a core banking system for
the first time and whose transaction volumes are not very high), a UNIX-
based system could meet their requirements. As more than 50% of the dealsin Asia have come from small banks, UNIX-based systems have become
more common.
The third phase of the project is implementation. The key objective is to
operationalise and pilot the transformed future state, including technology,
process and organisational change. This involves developing detailed
designs, including system designs for configuration and customisation and
designs for interfaces and data conversion. The other critical elements of this
phase are building and testing the system, implementing pilot projects and
conducting business acceptance tests at each stage. We recommend that
banks limit customisation of the core banking system to what is essentialas it may affect the core processing ability of the system. Rather, the banks
should customise the front end which interacts with the users.
At each stage, the bank should undertake delta analysis to determine the
ef ficacy and success of the project; this would determine whether it progresses
to the next stage. Delta analysis and sign-off at each stage are essential to
ensure that deliverables and expectations match, or else the project can
easily digress from its initial plan and increase in scope through incremental
changes which will lead to schedule and cost overruns.
The next and final phase of the project is deployment. This is probably the
most critical and challenging stage, where the bank undertakes the actual
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deployment of the new system. The process involves numerous logistical
issues such as data conversion, interfacing and coexistence.
Banks can approach this transition in two ways – big bang implementation
and gradual deployment. Big bang essentially means all systems go live at
the same time. While this is quicker, it is also riskier. Instead we recommend
phased implementation, where deployment is done in small clusters, though
the bank has to tackle the tricky issue of coexistence. We believe that the
gradual step-by-step approach is appropriate in most cases as it entails lower
risks, facilitates change management and allows changes to be incorporated
in the technical framework as it is being installed (to provide a better fit with
the business).
Data conversion and data mapping are two crucial elements that the bank has
to deal with during deployment. The data migration and conversion process
is often hampered by lack of available information on the old system. Mass
migration requires a large capital investment, takes a few years to implement
and poses a significant risk of service interruptions that can reduce customer
satisfaction. The other critical challenge is to maintain smooth operations
and develop interfaces across delivery channels during transition through
coexistence of two systems.
We believe that banks should predefine the milestones at each stage of the
replacement process and ensure they are adhered to. At any stage, if the
bank finds that it cannot achieve these milestones, it may review its project
and decide whether and how it wants to continue the project.
Our research into change management during replacement shows that the
majority of banks upgrade their system or implement a new one to meet
existing users’ process and work culture requirements. Instead, however,
we recommend that banks align their products, processes and work culture
with the new system. In other words, the replacement should be undertaken
together with product and process rationalisation coupled with work culture
transformation in order to optimise the returns from the new system.
This embracing of new technology requires tremendous effort in change
management, which demands extensive user training and re-engineering
of processes across the organisation. There is often resistance to change
and employee dissatisfaction during the transition. We believe this can be
countered only through effective communication and developing the right
business environment.
We have discovered that just 30% of recent replacement projects had active
CEO involvement. However our research shows that successful projects
require the backing of a strong leader from top management with a strategic
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mindset and the duty to see the project through. Strong leadership support
and a capable steering team (which can harness the bank’s resources, take
quick decisions and motivate staff to see the project through) are critical for
success. Banks need to develop strong internal teams that have effective
communication and technical skills, to share decision-making with the service
provider to overcome problems. The complexity of the process and inevitable
hiccups will demand that banks engage in the process with thorough planning
and programme organisation.
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1Core Banking Trends in Asia Pacifi c
This section examines the trends in core banking transformation
among Asian countries and covers a wide spectrum of issuesranging from pattern in deals, replacement approach, platformselection, implementation and key architectural trends. The aimis to learn from recent decisions and understand the marketdynamics of this region.
Core Banking Trends in Asia Pacifi c
Market Trends1.1 Prominent recent deals in the region1.2 Geographic dispersion of deals in recent years and 2006
estimates1.3 Activity within countries and their vendor preferences1.4 Estimates of system and software spending in Asia Pacific
Technical Trends1.5 Evolution and convergence of core banking systems1.6 Technology integration in Asian countries1.7 Trends in platform usage among Asian countries1.8 Trends in deployment approach
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1.1 Prominent Recent Deals in theRegion
Major Asian Core Banking Deals in Last two Years
In keeping with the worldwide trend, Asian banks have been activein replacing and upgrading their core banking systems in the last fewyears. We believe high demand and competitive pressures are forcingmany banks in the region to improve their technical base.
Analysing the recent decisions, we noticed three significant trends.Firstly, more than 50% of banks that decided to replace their corebanking systems were small banks with an asset base of less than$1 billion. Medium to large Asian banks are taking considerably long
to mull over the wisdom of replacing. Secondly, banks are increasinglyfavouring the UNIX platform. Part of the reason for this observation isthat most of the recent deals came from small banks, for which the UNIXplatform is more feasible. Thirdly, no vendor dominates the region, but Asian service providers have been given preference by banks whilevendors with strongholds in Europe and the United States find it dif ficultto develop a solid position here.
Looking at the geographic dispersion of recent decisions, we discoveredthat the concentration of replacements has varied in the last two years.However the Indian banking industry has taken a clear lead in corebanking transformation. Most of the deals came from state-ownedbanks like Bank of Baroda, Allahabad Bank and Central Bank of India.
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Market Trends
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No vendor dominates the country but Infosys and TCS have taken a fairshare of the pie. There has been a distinct preference for local vendorsas they offer international-quality products and yet understand the uniqueIndian requirements.
Leading Vendors in Asian Countries in Last two Years
In China, SAP clinched the core banking systems deal awarded by ChinaMinsheng Bank, marking the entry of this global vendor in the region.Chinese banks are increasingly considering replacement; howeverfollowing implementation problems in a few Chinese banks, they arenow more cautious about taking the plunge. Taiwan banks did not enterinto a single deal in 2004 but showed sudden activity in 2005. I-flex hasemerged as the top vendor in this country.
The Philippines was rather subdued with just two deals in 2005 (ascompared with five deals in 2004) – both came from smaller banks andwere won by Nucleus Software. The last major deal in the Philippineswas that of Union Bank of Philippines which replaced its system withFinacle of Infosys. Malaysia, on the other hand, continued to witness aflurry of activity with many small banks upgrading their ageing systemsprimarily through local vendors.
Internationally, one of the biggest deals in the past year was for HSBC’sglobal operations, which was won by Temenos. The bank is understoodto be improving further on the present solution. Within the region, DBS
Bank’s core banking deal was another feather in the cap of Infosys, a
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Core banking systems marketcontinued to be active in 2005
No vendor emerges as aclear leader in Asian region,but some vendors havehigher market share in certain
countries
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private banks in the country has forced most state-owned banks tosubstitute (and in most cases acquire for the first time) a centralised corebanking system to improve their competitiveness and retain their marketshare. However we expect the trend to slow down in the next couple ofyears as most leading banks have already entered into core bankingdeals. A few banks that have not yet upgraded their systems are findingit increasingly dif ficult to compete and are currently evaluating availableproducts and vendors.
Taiwan witnessed a recent surge in core banking deals, though mostlyfrom smaller banks. In China, the number of deals has been rising slowlybut steadily as more and more banks evaluate the need for replacement;however most of these deals have been from smaller banks. We expectthe current trend in both Taiwan and China to continue this year.
Malaysia has also been active with four deals in 2005, though most ofthese were again from smaller banks. However we believe some bigbanks like Maybank are actively considering core banking replacement.We expect to see more core banking deals in Malaysia with Islamic banksfavouring local vendors who can meet Islamic banking requirements.
Most other countries saw just a few small deals with the exception ofSingapore, where DBS has entered into a core banking deal for its retailbusiness. Thailand and Korea were noticeably absent from the scene in2005, but we expect activity in both countries to pick up over the nextcouple of years.
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1.3 Activity Within Countries andTheir Vendor Preferences
Activi ty in Banking Sectors for Core Bank ing Replacement in Last two Years
05 10 15 20 25 30
Vendor
Preference
InternationalVendors
Local
Vendors
Less active, international demand High activity, international demand
Less active, unique local needs Highly active, unique local needs
Trends
indicate likely
shift in future
% of banking
sector replacing
CBS in last 2
years
Singapore
South
Korea
Taiwan
Vietnam
Philippines
Thailand
India
Malaysia
Indonesia
China Legend
Source: Asian Banker Research
The level of activity is represented by the percentage of commercial banksin each country that have awarded core banking system deals in the lasttwo years. It is based on number of deals and gives the same rating to bigand small banks.
We believe that almost 25% of the Indian banking sector has enteredinto core banking replacement deals in the last two years. In absoluteterms, the number is far higher than that of any other country – though
as a percentage of the whole sector, it may not be as significant. Mostbanks in this country have preferred local vendors owing to not just the
international level of expertise and reputation of the vendors but alsotheir higher level of trust in them. Contributing to this is also the fact thatmany Indian vendors have advanced in these last few years to becomesome of the leading vendors in the world.
Interestingly, the banking sectors of Thailand and Korea saw no newdeals in 2005 despite being active in 2004. However there was increasedactivity in Taiwan and China. Increasing competition from foreign banksin these countries is forcing banks to evaluate their core bankingreplacement needs. We believe the core banking transformation in these
countries is set to accelerate over the next few years.
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Market Trends
Indian banks have favouredtechnical advancement throughlocal vendors
Other Asian countries expectedto continue to show demand forcore banking transformation
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Most Chinese banks have shown a strong preference for systemsthat are designed to suit their specific and unique requirements. Forthis reason, smaller Chinese banks have preferred domestic vendorswhile larger banks have preferred international vendors that can meettheir local needs. Similarly, many Malaysian banks have preferred localvendors that can meet their Islamic banking requirements.
Banks from developed markets like Singapore and Hong Kong havefirst-generation technical sophistication and are undertaking a cyclicalreplacement of their ageing systems. In contrast, banks in countries likeIndia, Pakistan and Vietnam are purchasing core banking systems forthe first time now. For obvious reasons, activity among the banks thatlack technical sophistication will increase.
We believe that most Asian banks prefer to select vendors that eitherinvolve local people through a setup in their country or partner localvendors. This is because there is a perception among the bankers thata local is more likely to understand and adapt to the unique local needsof a particular country. However in many countries, the availability ofinternational-quality products from local vendors is a limiting factor whichhas forced banks to look for alternatives.
•
•
•
China banks have preferencefor systems that cater to theirunique needs
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1.4 Estimates of System andSoftware Spending in AsiaPacifi c
Investments Made by Asian Banks in Core Banking System Software and Services
800
600
1,000
400
200
0.14
2004 2005 2006f 2007f 0
(%)($million)
0.10
0.13
0.12
0.11
Estimated spending by Asian banks on purchase of CB system software and services
Legend
Spending as % of total revenue of Asian banks
Source: Asian Banker Research
The estimates of investments only cover the cost of system software suchas licence fees and the service cost. It includes only core banking systemsreplacement by banks and excludes other system applications such astreasury and trade processing.
We have discovered that the cost structure of core banking deals variesconsiderably due to multiple factors such as the scale and complexity of
the replacement process. However, generally, we believe that the totalinvestment required to purchase core banking systems is made up ofsoftware and service cost which constitutes 30%, system integrationcost of 20-25% and hardware and infrastructure cost of 45-50%.
Based on our analysis of recent deals, the system and service cost fora small bank (with a size of $1 billion or less) comes to $5 million-10million. For a medium-sized bank ($1 billion-50 billion), it is $25 million-30 million. For large global banks (more than $50 billion), the deal sizeis likely to be higher depending on the extent of transformation beingundertaken.
•
•
Market Trends
Steady increase in spendinglikely to continue; no significant jump expected in near future
Deal sizes have varied fromabout $5 million for small banksto more than $50 million forlarge wholesale banks
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A critical cost item is system software cost; this includes the cost ofsoftware licences, which varies depending on project. For example, forFNS customers, software licence cost has varied from $1 million to over$7 million, with an average of $1.8 million in 2005.
Overall, we have seen a steady rise in investment made by banks in Asia over recent years. We expect the trend to continue. However, asa percentage of total revenue, we believe the investments are likely toshow a declining trend as the banks have witnessed even higher growthin revenue. We also believe that there is stiff price competition amongvendors and that this will keep the costs in core banking replacementunder control.
•
•
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1.5 Evolution and Convergence ofCore Banking Systems
Evolution of Core Banking Systems
Business PlatformJ2EE, .NET
EAI, BPM, WS
Parameterisation
Legacy
systems
1970 1990 2004 2005
Web XML Web services Serv ice-oriented architecture?
China Bank:
Kirchman
ICICI: Finacle
HDFC: I-flex for
retail
KDB: FNS
Banco de Oro:
ICBS
Chinatrust:
FNS
HDFC: I-flex for
corporate
OCBC: Silverlake
StanChart:
testing open
sys
Kasikorn: IBM
Taishin: FNS
Baroda: Finacle
B.Shanghai:
Temenos
HSBC-Temenos DBS -
Infosys Central Bank
of India - TCS
China Minsheng - SAP
Source: Asian Banker Research
Convergence in Core Banking Systems
Parameters
Mainframe
systems
UNIX
systems
J2EE, .NET platforms; EAI, BI, WS integration tools
Towards
core banking
systems today
Source: Asian Banker Research
The first generation of banking technology was represented by the IBMmainframe, which had immense data processing capabilities but was not
as ef ficient in back-of fice accounting functions. Nonetheless its reliability
•
Technical Trends
Evolution of core bankingindustry in Asia showsincreasing convergence of
technologies and focus onarchitecture of systems
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and scalability remain unbeaten today. In the next stage of evolution cameparameterisation of processing rules and enhancement in automationfrom back- to front-of fices. Here, the UNIX platform solutions haveshown high functionality, with some of them using relational databasetechnology to maintain accounting and administrative data.
UNIX systems have borrowed ideas freely from mainframes suchas logical partitioning, the ability for isolation, the ability to shareacross partitions, and common interfaces. Integration tools and othertechnological advancements have brought about a certain level ofstandardisation and convergence of technologies today at the platform,application and architectural layers.
Banks are increasingly looking for solutions that have the technicalcapability to meet their unique functional requirements while improvingtheir competitiveness. There is also increasing demand for component-based modular systems that do not have integration issues.
Trends in Requ irements
• Architecture that supports flexibility, growth and services such asService Oriented Architecture (SOA)
• Systems capable of global deployment – multi-channel, multilingualwith high connectivity
• Customer centric focus with increased connectivity acrossprocesses and functions. Integrated solution increasingly available
• Convergence of old and new technology with increased scalabilityand flexibility
Source: Asian Banker Research
Service Oriented Architecture (SOA) is a relatively new concept thathas gained popularity quickly. Herein, business applications areconstructed from independent reusable interoperable services that canbe reconfigured without a vast amount of technical labour. The conceptis based on web services and components that are brought together toperform specific business tasks. It essentially means reducing barriers inantiquated infrastructure and creating a real-time integration of disparatesystems and a sharing of databases on a flexible and easily upgradeableinfrastructure. We discuss this in more detail in section 5.
On the architectural front, J2EE and .NET are two architectural frameworks
that have evolved in the last few years. These are new-generation flexible
•
•
•
•
Banks need to adopt ServiceOriented Architecture
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and interoperable architectures that facilitate the complete meshing ofcore banking solutions with the complex technology fabric of the bank.
The key attributes that banks require from their architecture are flexibility,scalability and agility. With customer expectations increasing, banks havemoved towards centralised systems with customer-centric architecture,where they drive the business through a single view of the customer andthe paramount consideration in all decisions is the consumer.
IT Service Providers in the Region
• Vendor consolidation through mergers and acquisitions.
• Partnership among vendors to mix and match solutions.
• Standard protocols and fierce competition among IT serviceproviders leading to increased product offerings and pricecompetition.
Source: Asian Banker Research
The growth in demand for core banking systems in Asia Pacific hasprompted many international vendors such as SAP, Temenos, Fidelity
and Misys to focus increasingly on the region. At the same time, vendorsthat began their operations in Asian countries have grown to becomerecognised names across the world; these include companies likeInfosys, I-flex and TCS.
Desire to become the leading player in the market has led to mergersand acquisitions among IT service providers. At the global level, Fidelity’sacquisition of Sanchez broadened its reach to a larger collection ofbanks. Among leading vendors in Asia, TCS acquired FNS in a leap fromtheir previous alliance. Another example of consolidation in the industry
is Oracle’s acquisition of a stake in I-flex. These players are developingan increasingly strong foothold in the core banking systems market.
Greater convergence makes it dif ficult for bankers to differentiatebetween vendors’ value propositions. However standard protocols andfierce competition have led to more product offerings and price wars – aboon for the industry as a whole.
•
•
•
•
Asian vendors are increasingtheir global reach
Desire to become leadingplayer has led to consolidationin the industry
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1.6 Technology Integration in Asian Countries
Technology Integration in As ian Countries
‘ A c c o u n t c e n t r i c i t y ’
‘ C u s t o m e r c e n t r i c i t y ’
Thailand
India (State Banks)
Philippines
China
Malaysia
Indonesia
Hong Kong
Taiwan
Singapore
Aus tral ia
India (Private Banks)
Japan
Korea
B r a n
c h
c o m p u
t e r i s
a t i o n
B r a n
c h
n e t w
o r k i n
g
C e n t r a l i s
e d
d a t a
c e n t r e
C o r e
b a n k
i n g s y s t e m s
a d v a n c
e m e n t
R o b u
s t m i d d l e w
a r e
a n d b
a s i c C R
M
W e b s
e r v i c
e s a n d
c u s t o
m e r
c e n t r i c
i t y
Source: Asian Banker Research
We tracked the technical advancement of banking sectors andarchitectures in several Asian countries. We discovered that theintegration of technology and the movement from account centricity tocustomer centricity have varied significantly among Asian countries.Developed countries such as Japan, Singapore, Hong Kong and Australiahave shown distinct technical advancement not only on the core bankingfront but also in their banking systems architecture, achieving customercentricity through integration.
On the other hand, developing countries like China, Thailand, Philippines,Indonesia and Malaysia are far behind. These countries are now movingtowards data centralisation (having advanced from branch automation),but many of the banks have yet to achieve core banking sophistication. Architectural integration is still at the initiation stage in these countries.However we believe that competitive pressures are forcing banks toexpedite this process.
In India, relatively new private banks have given a new direction and asignificant boost to core banking integration in the banking sector of thiscountry. State-owned banks are already beginning to arm themselveswith more integrated systems to face this competition.
•
•
•
Technical Trends
Developed countries haveshown distinct technicaladvancement
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1.7 Trends in Platform Usage Among Asian Countries
Recent Core Banking Acquisition Trends Among Asian Banks
● South Korea
● China
● Pakistan
● Taiwan
● India
● Vietnam
● Singapore
Primarily UNIX-basedSystem Users
● Japan
● Hong Kong
● Philippines
● Thailand
● Malaysia
● Indonesia
Primarily Mainframe-based System Users
Likely to shift to UNIXSource: Asian Banker Research
Traditionally, Asian banks – particularly those in Korea, Japan and China – use mainframe-based proprietary systems. The robustness, stabilityand scalability of these systems have been proven over the years andcontinue to attract these banks. But in the last five years, market dynamicshave changed considerably and banks are increasingly considering theUNIX-based systems.
The shift in preference has been brought about by competitive pressuresin the market which have forced banks to look for systems that can meettheir functional requirements with flexibility and agility. Acceleratingthe trend is the fact that most Asian banks are smaller compared withmany European and multinational banks and hence UNIX systems areconsidered adequate for their scalability requirements. Another majorfactor that draws many bankers to UNIX is the cost savings. Changes inregulatory requirements (under Basel II) have also forced banks to lookfor an integrated and flexible system.
For these reasons, we have seen an increasing shift among Koreanand Chinese banks towards UNIX-based systems. However Japan and
many South East Asian countries still seem to be adopting a “wait and
•
•
•
Technical Trends
Many countries continue to beprimarily mainframe users butthere is a strong shift in favourof UNIX systems
Competitive pressures and costeffectiveness of UNIX-basedsystems are driving the shift
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see” approach. In mature countries like Singapore, there are very fewdeals as well; but in the country’s most recent deal, DBS opted in favourof a UNIX platform.
In the Indian subcontinent, most commercial banks are adoptingcore banking systems for the first time. Thus most banks have takenadvantage of this new-generation technology. As there is no problemof integrating with the existing system, implementation is cheaper andless complex. Moreover, the traditional preference of Indian banks (andIndian vendors) is for a UNIX environment.
While smaller Asian banks have favoured UNIX-based systems owingto their cost effectiveness, we believe that mainframe has proved to bemore reliable and scalable for a larger size of operations. As transactionvolumes increase, the total cost per user in mainframe decreases,making it more competitive.
•
•
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1.8 Trends in Deployment Approach
Deployment Approaches in Recent Core Banking Decision
Long
Duration
Existing
Implementation
Time
Short
Duration
Gradual Implementation Big Bang Implementation
Implementation
App roac h
Singapore
HSBCBank
ChinaMinsheng
Bank
CentralBank of
India
AllahabadBank
MuslimCommercial
Bank
Bank ofPanshin
UnionBank of
Philippines
Bank of East Asia
Hua XiaBank
IndustrialBank ofKorea
CathayUnitedBank
StateBank of India
DBSBank
ChinaDevelopment-
Bank
Bank Asset Size
More than$100 billion
$20-100 billion
Less than$20 billion
Source: Asian Banker Research
The banks have two options in deployment. “Big Bang” implementationlargely involves a new system which goes live at the same time thatall the processes are shifted onto it. This is believed to be the quickestbut probably also the riskiest way to deploy the project. While therisks are high, the integration problems are minimised as old and newsystems do not coexist. A phased approach, on the other hand, involvesgradual deployment across branches/functions generally through “bigbang” in small clusters. Here, the banks have to face the sticky issue ofcoexistence of two systems.
Our research shows that in Asia Pacific, the traditional phased deploymentapproach is distinctly preferred for its reduced risks and gradual changein processes. Though the choice of approach varies with banks’ uniquerequirements, top-tier banks in general have preferred the gradualapproach. This is because their scale of operation makes “big bang” notonly extremely dif ficult but in some cases also unfeasible.
Most banks with an asset size greater than $100 billion have preferredphased deployment and the time required has stretched over manyyears. For example, it is expected to take about five years for HSBC.Similarly, ABN AMRO plans to gradually implement its system in the
Greater China region and some other Asian countries over a period of
•
•
•
Technical Trends
Bigger banks continue to prefergradual deployment while somesmaller banks choose “bigbang” approach
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five years. For State Bank of India and Central Bank of India, it is likely tobe around four years. We believe that it is critical to keep the rollout timeand the period that two systems coexist as short as possible.
On the other hand, a few smaller banks have taken the quicker approachof “big bang”. These include: Union Bank of Philippines whose systemby Infosys was implemented in just one year; Industrial Bank of Korea byTemenos; and Cathay United Bank, Taiwan by TCS-FNS.
•
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2Bankers’ PerceptionSurvey on CoreBanking SystemSelectionWe have conducted a series of surveys in the Asian banking
sector to strengthen our research on various aspects of corebanking transformation. Our surveys have given us an insight
into how bankers assess various vendors in the region, key
considerations in the selection of a new system, and platform
preference among Asian banks. We have discovered that some
of the common perceptions lack sound foundation.
Bankers’ Perception Survey on Core Banking SystemSelection
2.1 Survey results on key reasons for replacement
2.2 Survey results on factors considered in system selection
2.3 UNIX versus mainframe – survey results on considerations in
system selection
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2.1 Survey Results on KeyReasons for Replacement
Perception Survey on Key Reasons for Replacement
% of executives citing area as a problem10 20 30 40 50 60 70 80
Other
Errors in operation
Errors in data
Availability
Errors in processing
Scalability
Timing problems
Technology
Simplification
Integration
Cost
Flexibility
Source: Asian Banker Research
A survey done in Asia Pacific countries last year found that inflexibility,
high cost and dif ficulty of integration were the three main problems that
banks faced in legacy systems.
•
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2.3 UNIX Versus Mainframe – Survey Results onConsiderations in SystemSelection
Perception of Strengths of Each System
Interestingly, mainframe systems
are perceived as old, while UNIX
systems are perceived as new,
which is not always true.
Stability
Old
Archit ecture More Vendorsvs Monopoly
Scalability App lication
Avai labi lit yInstability
42
32
21
37
47
37
115
MAINFRAME SYSTEMS UNIX SYSTEMS
Avai labi lit y of
Internal Skills
Many banks in Korea and Japan
use internal programmers to
customise their systems.
Total Cost of
Ownership
UNIX systems can be
approximately 50% cheaper
than mainframe technology.
For operational expenses, UNIX
systems can be 30-40% cheaper
than mainframes.
Source: Asian Banker Research
In a survey done some months back, we asked bankers what they sawas the strengths and weaknesses of UNIX and mainframe systems. Wefound that while there are an increasing number of banks favouring UNIXsystems due to low cost of ownership, scalability and recent technicaladvancements, stability is still perceived to be the biggest strength ofmainframe systems.
According to one banker, keeping legacy systems running consumes 60-70% of IT budgets, leaving little resources for technical enhancements
to gain competitive advantage. According to one bank in Korea, “Whenwe purchase a UNIX system, we enter a buyers market as there aremany products available and we can choose. But when we purchasemainframe, we enter a sellers market and may have to wait.” Anotherbanker feels that while UNIX technology is improving, it may not matchthe scalability of mainframes yet.
Banks that have invested in their system are aware that a considerableamount of time, money and effort is involved in customising and adaptingthese systems. Replacing these systems is a painful and risky exercise.However the fact remains that many of these legacy systems are unlikelyto give banks the innovation and technical advancement that can be
provided by solution providers who have been constantly upgrading
•
•
•
Stability is the biggest
perceived strength for
mainframe systems, while lower
TCO is the biggest perceived
strength for UNIX systems
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their technology. Banks are increasingly realising that their expertise isin banking and not IT development.
According to a leading global vendor, Asian banks have always beenvery interested in UNIX solutions and so, proportionately speaking, wehave more UNIX centres in Asia than in the United States. We believethis is because the core banking market today is dominated by Indianbanks, which have traditionally preferred UNIX-based systems.
While the debate over preferred technology continues, it goes withoutsaying that what may be considered suitable by one bank may not beappropriate for another bank. For example, big banks with an extensivescale of operation may find it risky to switch from mainframe systems toUNIX technology primarily because of complexities, high risks and hugecosts involved in the process. However a small bank which is building itscore banking system from scratch (or replacing it) may prefer lower-cost
open systems.
Open Versus Proprietary – Perception of Features
Strengths
Weaknesses
Strengths
Weaknesses
Reliability - Highly reliable
Scalability - Highly scalable, essential for larger banks
Robustness - Robust applications with good track record
Security - Substantially higher levels of system security
Cost - Cost to acquire and maintain
Agility - Perceived slower development and adaptations
to trends in technology
Hardware/Software - Fewer hardware and software
suppliers can lead to challenges in negotiating a
reasonable pricing if the bank does not posses sufficient
bargaining power
Skills - Smaller and hence more expensive pool of
skilled resources available in the market
Cost - Perceived lower total cost of ownership (TCO).
However, in real life operations, the TCO in complexity ofoperation increases with the numbers of users and
transactions volume
Architecture - Considered more flexible architecture. Our
analysis however shows that some of the mainframe
solutions have a more contemporary architecture
"Add on's" - Perceived higher availability of third party
applications. However, our analysis shows that such
applications can also be integrated into mainframe
architectures
Hardware/Software - More choice of hardware systems,
and application software provider
Functionality - Integrated universal Banking solution
often provide higher level of functionality (at the cost of
scalability)
Skills - Larger pool of skilled resources available in themarket
Reliability - Less stable than mainframe systems (but this
could be acceptable for smaller banks)
Scalability - Lower level of scalability. Scalability comes at
the cost of overly complex operating environments
Security - Lower level of security than mainframe
systems. Viruses have been found in Unix based
environments
Deployment -Not yet proven on large scale though
becoming increasingly popular among smaller banks
UNIX SYSTEMMainframe SYSTEM
Source: Asian Banker Research
•
•
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Open systems have proved their ability to perform from the security and
technology points of view. According to one banker, “5-10 years ago a
large bank would go for mainframe, no questions asked. But in the last
5-10 years things have changed. Any bank today, no matter how big,
may consider switching to open system.”
On the other hand, most big banks still favour the reliability and stability
of mainframes. Some bankers are inclined towards proprietary systems
as they are used to working on them. Switching to a new technology
would not only involve a huge amount of cost and high risks but also
require effort to get used to the new processes.
According to one vendor, “Open systems are most appropriate for Asian
banks due to their smaller size compared to many international banks.
They don’t need the scalability of mainframes and the scalability of open
systems has really increased in recent years.” One leading bank in Korea
states that the trend in Korea today is to shift towards UNIX systems
from IBM “due to the availability of small packages that can be easily
integrated in our system [whereas] when we use mainframe we need to
code them which would be a time consuming proposition”.
The right choice varies with banks’ requirements
As can be seen from the survey, platform choice is a dilemma that all
bankers face when they consider replacement. Our in-depth analysis
shows that for smaller Asian banks, a UNIX platform could be more
feasible as they may not need the scalability of the mainframe and UNIX
can be cost effective for a small number of transactions. However our
research shows that for large retail banks, mainframe is likely to still be
the preferred choice because:
It is more reliable and keeps the system running through most upgrades.
Hence the downtime is low.
It has the capability to support a large number of users, supports
multiple applications and allows better resource management. This is
especially important where transaction volumes are high.
It requires less server capacity than UNIX for the same amount of work
and has higher continuous availability (due to less downtime).
On the cost issue, UNIX-based systems are generally believed to have
a lower total cost of ownership (TCO). However the benchmark, we
believe, should not be total cost of ownership but total cost per user. Our
research indicates that when the bank has large volumes of transactions
and users, the operational cost of mainframe could be lower on a per-user
•
•
•
•
-
-
-
•
Strengths and weaknesses of
proprietary and open systems,
as perceived by respondent
banks
Our research and analysis of
the platform features reveal a
different picture
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basis. Also, while making the cost comparison, banks must consider the
switching costs (shifting from existing mainframe to UNIX) and the cost
of the coexistence of two systems during the replacement process.
Please see our section on platform choices in section 4 for more details
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3.1 Core Banking System – AnIntroduction and Defi nition
Core banking replacement is becoming a hot topic in banking. We
have discovered that many banks are considering core banking system
replacement because of the following perceived needs:
Ageing Technology Infrastructure – Ageing technology that is
increasingly dif ficult and expensive to maintain and support
No Common Customer View – Multiple customer views and complex
processes are not easily integrated with the existing technology
infrastructure
No Product Factory – Innovative, highly interdependent product bundles
are not supported by the existing core banking system; it is laborious to
launch new products and services
Long Deployment Cycle – Technological inflexibility demands lengthy
development cycles
No/Limited Basel II Support – New and more complex Basel II-drivenrisk frameworks are not supported
Due to such perceptions, the business users demand an immediate
replacement of the core banking systems. Here are some examples of
the justification given for this investment to address all of these issues:
“We are losing market share. We need to replace our core banking
system now to increase our competitiveness and regain lost markets.”
“We need to replace our core banking system to have a better
understanding of our customer.”
“We need to replace our core banking system to be able to bring new
products to the market faster.”
“We need a core banking-enabled product factory.”
These and similar statements are what we hear when talking to leading
bankers throughout the region.
The software vendors of course are responding to these needs, by
claiming:
•
-
-
-
-
-
•
-
-
-
-
•
Perceived needs justifying
replacement of core banking
system
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Core Banking System Overview
“Our system will transform your organisation and make your bank more
competitive.”
“With our system, you will be able to significantly enhance your CRM
capabilities and gain market share.”
“Our solution will automate your lending process, improve your collateral
management capabilities and make you Basel II compliant.”
The key questions which now arise are:
Are the bankers’ perceptions about the outcome of a core banking
replacement correct?
Does a “traditional” core banking replacement project address all of
these issues?
Do the statements made by software vendors truly reflect what their
clients can expect from a core banking replacement project?
To answer these questions, it is necessary to clearly define what a core
banking replacement really is
3.1.1 Definition of a core banking system
We have discovered that there are multiple definitions of core banking
systems today. However based on our discussions with industry experts,
we can define core banking, in simple terms, as a highly ef ficient “customer
accounting” and transaction processing engine for high volumes of back-
of fice transactions. The purpose of a core banking system is thus to
give banks the ability to process large transaction volumes in a fast and
ef ficient way; clearing, transfers and interest/fee calculation are all the
fortes of core banking. But let us explore this in more detail and look atsome of the myths regarding core banking replacement projects.
What Core Banking Systems Do
A core banking system is a transaction processing engine with customer-
level accounting and reporting of the deposit and loan products processed
in the bank.
Core banking also deals with transactions such as interest and fee
calculation, pre-processing for statement printing, end-of-day processing,
and consolidation of daily individual transactions as
-
-
-
•
-
-
-
•
•
•
Core banking system is simply
the core processing power of
the bank
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Core Banking System is Transaction Processing Engine
Deposits Loans
Common Services
Product Definition & Management
CoreBanki ng System
C h a n n e l I n t e g r a t i o n
A p p l i c a t i o n
I n t e g r a t i o n
R e p o r t i n g
Core Banking replacement does
not provide you with a front end,
CRM or multi-channel capabilities.
Core Banking replacement does
not provide you with an industrial-
strength general ledger system,
and ERP capabilities.
Replacing the Front End is a
separate system and a separate
project
Replacing the General Ledger is a
separate system and a separate
project
Core Banking replacement does not provide
you with an industrial-strength customer
information repository which allows ease of
integration of disparate core systems
Core Banking replacement gives you raw
power. It provides you with a highly efficient
engine for all your transaction processing
needs
General Ledger
System
Front-end
System
Core Banking System
Customer Information Repository
Source: Asian Banker Research
“accounting entries” which are posted into the bank’s GL system
according to its chart of accounts structure for the daily trial balance
sheet preparation. The chart below illustrates the scope of a core bankingreplacement project.
What Core Banking Systems Do Not Do
Core banking systems do not deal with the customer-facing front end
of the bank. Core banking systems also do not deal with the analytics
embedded in an industrial-strength data warehouse design.
Core banking systems do not include a comprehensive CIR (Customer
Information Repository) though they do include a CIF (Customer
Information File) or CIS (Customer Information System) focused on their
own processing and reporting needs. These components have only thenecessary customer information or capabilities embedded.
In a Service Oriented Architecture solution, the CIR will sit on top of
the core banking systems, as it is assumed that a bank will always
have multiple core systems which need to interact and share customer
information. The chart below illustrates a typical banking architecture
and shows where the key components reside.
•
•
•
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Conceptual Application Architecture Framework
Sales & Service
Delivery
Business
IntelligenceCore Systems
Delivery Channels
Application supporting the
bank’s delivery channels.
Integrates into the customer
relationship management
and core systems
Data Warehouse & Data Marts
Enterprise data warehouse
with relevant data marts
Relationship & Risk
Management Infrastructure
Common customer view and
central customer liability. “The
customer belongs to the bank”
and not a booking unit
Data Mining
Utilise existing information in
the data warehouse e.g. to find
customer behaviour pattern
Imaging and Workflow
Imaging and workflow
capabilities e.g. for the
commercial lending process
Middleware Infrastructure
Integration infrastructure to
link the bank’s systems. A
modern architecture is built
around an enterprise service
bus utilising an SOA
New Age Channels
Internet-based virtual
delivery channels, including
Web and WAP services
Customer Information
Repository
D a t a W a r e h o u s e
C h a n n e l I n t e g r a t i o n
P h y s i c a l
C h a n n e l s
V i r t u a l C h a n n e l s
Other Support Systems
Workflow ManagementDocument Imaging Capability
Core Banking
Dep osi ts L oan s
A p p l i c a t i o n I n t e g r a t i o n
C h a n n e l I n t e g r a t i o
n
R e p o r t i n g
Common Services
Product Definition & Management
Source: Immacon Research
3.1.2 What to expect in core banking replacement
To start an effective core banking replacement programme, the bankmust manage the expectations of all parties involved. Therefore we
believe that it is very important to clearly understand what a “core banking
replacement” really is. In some cases, a bank might not even need to
change the core banking system but just refresh an ageing front-end
system. In other cases, a bank might need to do both, i.e. replace the
core banking system and simultaneously replace the front-end systems
of the bank. This of course is a project of much greater magnitude and is
analogous to changing the wheels in a fast moving car.
What you see is not what you get
Many banks evaluate core banking systems based on functions andfeatures. The objective is to get as many bells and whistles as possible.
As the initial selection is very much driven by the business user, the
vendor would score highly with a “pretty” front end and usability.
The irony here is that the user will not get what he sees. We have
discovered that it is a common and understandable misconception of
business users that front-end screens relate to core banking. This more
often than not leads to sub-optimal results for the core banking project.
It is crucial to recognise that what the user sees is the front end of a
banking application architecture (a teller system, an advisor workstation,
a kiosk or an internet front-end) but not the “core banking system”. Core
•
•
•
•
Critical for banks to understand
what they would get in core
banking replacement
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banking is about raw processing power: transaction throughput, interest
and fee calculation, parameterised product setup, clearing, interfacing
with existing systems and transaction sources, etc. The good-looking
screens have little to do with critical aspects of core banking and are no
indicator for the quality of the core banking system.
3.1.3 Rationale for front-end systems replacement
To make matters more complicated, it is often important to also change
the front-end applications, to better reap the benefits of the core banking
replacement. For the front-end replacement, it is critical to make sure
that the front-end applications can be integrated with the back-end
systems with minimal effort. For a contemporary core banking and front-
end replacement project, it is advisable to deploy SOA and an enterprise
service bus.
To deploy a front-end solution for a new core banking project, there are
three options:
Package solution with minimal customisation: This is typically
the going-in position of banks that are accustomed to “best of breed”
package implementations. The potential advantages are fasterimplementation and lower customisation costs. However, the bank
that takes this approach must be determined to follow through and
use the package capabilities as provided. Many banks find it dif ficult to
sustain this approach as the project progresses and the limitations of
the package become clearer.
Package solution customised to the bank’s desired processes:
This approach requires the bank to define its multi-channel front-end
operating model, processes and performance metrics prior to selecting
the front-end package. The advantage of this approach is that the
upfront design can help establish a realistic business case and give
clear requirements for vendor selection and contracting. However, thisapproach requires experienced business process designers capable of
defining the future operating model of the bank.
Custom built solution: This approach requires technical and business
process designers capable of defining the future business and technical
architecture to build and implement the solution. Few banks in the world
are suitably equipped for such an undertaking at this time.
During package selection, the bank will typically need to choose from
the following scenarios:
•
•
-
-
-
•
Banks may also need to
replace front end to reap
benefits from core bankingreplacement
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Same vendor for front end and core banking: Here, front-end and
core banking replacement solutions, though separate systems, come
from the same vendor and the vendor is responsible for integrating the
front- and back-of fice applications. This, we believe, is a sound option
as the bank deals with only one party and the integration between the
two systems is taken care of. However, not many core banking vendors
offer this option. In addition, problems could arise if the integration has
been done through the traditional approach of tight coupling and does
not utilise the benefits of an SOA or enterprise bus.
Front-end solution and core banking replacement solution come
from different, unrelated vendors: This option is often presented
as the “best of breed” approach. Our research shows that in practice,
however, this has proven to be the least desirable option. There are
integration issues to deal with and often both the front end and the
back end (core banking) need to be highly customised to fit with the
solution chosen. Moreover, who decides what is “best of breed”?
-
-
We recommend that banks
choose the same vendor for
core banking and front end
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3.2 Overview of the Core BankingSystem Replacement Project
Core Banking System Replacement Project – an Overview
Reasons for
replacement
Gap analysis of
existing
infrastructure
Select right
platform
Select right
architecture
Evaluate
financial
impact
Risk-return
analysis
Select software
vendor and
integrator
Identify right
approach to
implementation
Project Stages
Development
of business
objectives
Selection of
approach
Development
of selection
criteria
Bidding
process
System
selection
Selection
of service
provider
Implementation
and launch
Ongoing
technical
support &
enhancement
Source: Asian Banker Research
Replacing or even upgrading the core banking system is a complexand high-risk proposition requiring substantial resources and time. Most
banks prefer to defer the decision till the change becomes imperative.
The decision making process includes providing financial and business
justification to the management and evaluating the risks and returns; it
is a time consuming process that requires the involvement of not just the
IT people but also decision makers across functions. We believe that
opportunity costs are high and hence a successful bank is one which
can take fast decisions and has adequate management support to carry
them through.
Risk-return analysis has to be coupled with development of business
objectives, gap analysis of the existing infrastructure and delta analysis
of future needs. We believe that it is critical at all stages of selection
and implementation that banks keep business objectives in mind as the
primary consideration.
•
•
Core banking replacement isalmost like a heart transplant
involving high cost, high risk,
and substantial effort and time
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Core Banking Replacement Stages
Replacement Stages Through the Project
E f f i c i e n c y / P e r f o r m a n c e
Projectstart
Euphoric
"We will changethe world"
Disillusioned
"This is hard but we
have passed the
point of no return"
Reality Strike
"The honeymoon
is over"Scapegoating
"It’s somebody else's mistake"
"How can we get out of this"
The Emperor’s New Clothes
"We got the old systems in
new clothes"
Masters of the
World
"We made it"
Continuous
Improvements
Source: Immacon Research
Many projects in the past have failed to meet their intended objectives.
While there can be numerous causes for failure, the key reasons include
inadequate planning, lack of risk mitigation and inability to make the
right decisions at the right time. The mismatch between deliverables and
expectations often arises from inaccurate estimation of requirements and
scope of project and corresponding unplanned changes in the proposed
project.
Please refer to risk mitigation in section 4 for more details. We also
discuss the replacement phases and critical considerations of each phase
in section 4
•
Core Banking System Overview
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3.3 Approaches to Replacement Approaches to Core Bank ing System Replacement
In-house
development and
implementation
Purchase of system
software and
services
Complete
outsourcing
Ownership of hardware and
software
Software either developed
in-house or purchased from
vendor
Implementation of system done
in-house
In-house IT expertise required
– suitable for large banks
Approach adopted by many
banks in Japan and Korea
•
•
•
•
•
Ownership of hardware
System integrator hired for
software
Vendor customises, integrates
and implements solution
according to the bank’s
requirements
Critical to select the right
software and vendor with
domain knowledge
Approach adopted by many
medium and small banks
•
•
•
•
•
Outsourcing of software and
hardware
ASP hired to meet the core
banking needs of bank
ASP maintains the accounts
and branches through its own
data centre, and meets all the
core banking needs of bank
Charges calculated on per
transaction or per branch basis
ASP provides expertise but
may commoditise service
•
•
•
•
•
Source: Asian Banker Research
Our research shows that banks can choose from multiple approaches for
upgrading or replacing their core banking systems. The most appropriate
approach would vary with the availability of technical skills, complexity of
the task, availability of products and costs involved.
Many banks, particularly large banks, have preferred to develop systems
in-house to suit their business requirements (as can be seen in many
banks in Japan, Korea and China). This is primarily due to the complexity
of their operations and their desire for flexibility in developing a system to
meet the unique requirements. However this requires extensive capital
investment and channels substantial resources away from the banks’
core business.
The debate on ‘Build’ versus ‘Buy’ continues among a few top-tier banks
that have the ability to build their own systems. But increasingly, banks
are awakening to their shortcomings as an IT developer and becoming
more inclined to focus on their core business instead.
Banks select a replacement approach based on their individual
requirements. For example, HSBC has chosen a middle path by taking
Temenos as its partner in co-developing an international core banking
system. The bank and the IT company would thus pool their resources
and technologies to develop the best solution.
•
•
•
•
Bank’s approach to core
banking replacement depends
on the availability of financial
and human resources
Buy vs. Build
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4Phases of Core BankingReplacement andCritical Considerations
Replacing a core banking system is a complex and high-risk
proposition. This section analyses in detail the key requirements,critical considerations and challenges in each stage of the corebanking system replacement project. Going further, we discussthe factors that we believe are essential ingredients for success.This section is targeted at both business decision-makers as wellas IT people involved in the transition process.
Phases of Core Banking Replacement and Critical Considerations
4.1 Phases of core banking replacement – an overview4.2 Timeline of replacement project stages4.3 Phase 1 – business justification and blueprint
4.3.1 Developing business objectives4.3.2 Delta methodology – assessing future requirements
4.4 Phase 2 – selection4.4.1 Reasons for replacement4.4.2 Considerations in determining selection criteria4.4.3 Key considerations in vendor selection4.4.4 The right architecture and platform4.4.5 Selection process
4.5 Phase 3 – implementation4.5.1 Key challenges and critical success factors
4.5.2 Implementation process4.6 Phase 4 – deployment
4.6.1 Deployment process4.6.2 Deployment approaches
4.7 Risk mitigation4.8 Financial implications
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4.1 Phases of Core BankingReplacement – An Overview
In our analysis of best practices for core banking replacement, wehave identified four key phases required for a successful core bankingreplacement project, namely:
Core Banking Replacement Project Phases
Understand Business Imperatives
Achieve Consensus on BusinessDriver & Approach for Core
Banking Replacement
Define Core Banking
Transformation Strategy eg.
Replacement or Transformation
Develop “Delta” TransformationBlueprint
- Business Scope & Objective
- Reference Technical & Business.. Architecture
- Platform Preference
- Process Transformation Scope- Organisation Alignment
- Visualisation of “New World”
- Business Case / Financial Impact.. Analysis
- Risk-Return Analysis
Develop “Long List” for Vendor &
Integrator
Request for Information
Finalise Platform Choice, Refine
Requirements and Develop
“Short List”
Agree on Selection Process
- Delta or Traditional GAP- Scoring or Judgement
Prepare Request for Proposal
Update / Refine Business Case
Bidding & Contracting Process
Award Contract
Delta Definition
Delta Resolution
Design
Build & Test
Pilot
Training & Change Programme
External & Internal Communication
Logistics
Rollout Schedule
Big Bang or Phased Deployment
Project Phases
Business
Justification &Blueprint
Selection“Delta Driven”
ImplementationDeployment
4 - 6 Months 4 - 6 Months 18 - 24 MonthsDependent on Chosen
Deployment Approach
Source: Immacon SOBIT Methodology
The Business Justifi cation and Blueprint Phase sets the stage for thecore banking replacement project. During this phase, a bank takes stockof its current environment, revisits its business strategy and establishes
business drivers for its future technology and process infrastructure.
The Selection Phase is when a bank shortlists suitable vendors andintegrators and decides on the vendor management approach. As aproject of this magnitude cannot, in most cases, be done by one vendor/integrator, it is important at this stage to decide on which of those hiredwill be the prime vendor.
“Delta Driven” Implementation is recommended over the traditional“Gap” driven approach. The disadvantage of the “Gap” driven approach isthat the specifications for the new system, more often than not, resemblea detailed description of the existing “Old World” legacy system. In
•
•
•
•
We divide core banking
replacement into four phases
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The Phases Of Core Banking Replacement
contrast, the delta driven approach focuses on requirements beyond theexisting legacy systems. This approach looks at the future operation, the“New World”, and how a bank can optimise the selected core bankingsolution. The objective is to develop a “legacy free” environment as soonas possible.
The Deployment Phase is the final stage of any core banking project.In this phase, the enterprise-wide deployment of the new core bankingsystem is conducted. To be successful, it is important that both bank andvendor have agreed at the outset on one deployment approach. Themost debated options are the big bang and the phased deployment. Inaddition, there are a number of variations to these two popular options.
•
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4.2 Timeline of ReplacementProject Stages
Core Banking Replacement Project Phases
Project Phases
Business
Justification &
BlueprintSelection
“Delta Driven”
ImplementationDeployment
4 - 6 Months 4 - 6 Months 18 - 24 MonthsDependent on Chosen
Deployment ApproachSource: Immacon SOBIT Methodology
As time management guru Alan Lakein has taught us, “failing to plan isplanning to fail”. Thus the first phase of the core banking replacementproject provides an overall plan for the initiative. It is important for businessdecision-markers to agree on the business objectives and justificationfor the replacement, followed by detailed planning of what should beachieved with the new core banking solution. At this stage, we believethat it is also important to decide if the core banking replacement projectshould be approached as a transformation or as a replacement project.Wavering in the objective of the project would be a costly mistake.
Our research shows that a typical core banking project takes 18 to 24months from the time the bank acquires a solution to the commencementof deployment. Smaller banks using a proven solution with little or nocustomisation can of course expedite their schedule. The chart below showsan illustrative implementation schedule of a typical core banking project.
Illustrative Core Banking Implementation Project Schedule
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Phase 1: Business Justification & Blueprint
Asses s Curr ent Oper ation s
Understand Business Imperatives
Blueprint & Visualise Future Operations
Prepare Implementation Roadmap
Develop Business Justification
Phase 2: Selection
Issue RFP & Receive Responses
Issue RFI / Refine Vision
Select Systems & Service Provider
Conduct Negotiation & Contracting
Phase 3: "Delta" Driven Implementation
Detailed Design
Delta Analysis
Build & Test
Pilot
Phase 4: Deployment
Training
Logistics
Change Management & Communication
Go Live
Fine Tune
Phase
4 to 6 months
6 to 9 months
18 to 24 months
The 'future state' defined in the blueprint and visualisation is input to the RFP requirements and the solution design and underpins the changemanagement and business transformation efforts.
The selection timeframe is dependent on the number of vendors involvedand the level of detail required by the RFI and RFP documents.
Source: Immacon SOBIT Methodology
•
•
A typical core banking
replacement project takes 18-
24 months though the duration
varies with the extent of change
and size of bank
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4.3 Phase 1 – BusinessJustifi cation and Blueprint
4.3.1 Developing business objectives
Objective: Develop business objectives and establish the vision and justification for the target future state.
Core Banking Replacement Justifi cation & Blueprint Development
Sign Off
Understand
Business
Imperatives
Assess
Current
Operations
Blueprint &
Visualise the
Future
Operations
Prepare
Implementation
Blueprint
Develop
Business
Justification
Business
Justification &Blueprint
Selection“Delta Driven”
ImplementationDeployment
Project Stages
Source: Immacon SOBIT Methodology
Key Requirements From Core Banking System Replacement
• Integration - Seamless integration of system and operations for
time saving and cost effectiveness
• Single Customer View - Ability to have easy access to a single and
precise view of customer relationship
• Product Factory - Customer-centric system that facilitates develop-
ment and deployment of new products and services with ease andreal-time information
• Straight Through Processing - Improved, faster and comprehensive
banking functionality
• Multi Channel Sales & Service - Ability to implement cross channel
sales effectively and efficiently
• Data Warehouse - Large volume of data made easily accessible to
facilitate quick decision making
• Flexibility - Ability to adapt to constantly changing requirements of
business in future
Source: Asian Banker Research
Developing business objectives
of core banking system
replacement
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While banks are awakening to the need of advanced and more flexiblesystems to meet the requirements of banking industry today, we believethat each bank needs to initiate the process by developing clear businessgoals and objectives of core banking replacement to meet its own uniquerequirements. These objectives would facilitate involvement of businessinto the project (which would otherwise have the risk of being seen as anIT project) and also would give clear directions to the selection process.
Assessing business demand, future business directions and anticipatingfuture requirements would ensure that the bank can suitably select the
system that can meet its expectations. The ability of ageing IT systemshas become limiting factor for ambitions of future growth. In many banksnumerous back processes are as a consequence of maturity of a 10-15year old system. New systems are now required to provide considerablesynergies and ef ficiencies towards meeting long term targets.
While the broad requirements from the system functionality would besimilar for most banks, unique requirements would vary. Improvingcompetitiveness and garnering market share is one common objectivecited for replacement. In some banks it may actually be a case of ‘survival’rather than choice that forces the management towards replacement.
A global bank is likely to require more scalable system with multi-channel, multilingual capability across geographic locations. SimilarlyBanks in India and Pakistan may believe that product differentiationand service oriented features are more important to meet the needs ofgrowing middle class and maintaining competitiveness. For example ingrowing economies banks would rather grab a larger chunk of marketshare than just riding on growth. These unique needs should guide thebank in developing its long term strategic objectives.
These Business objectives should in turn act as key guiding factor inestablishing selection criteria. These should be forward looking to ensure
suitability of the new system in long term as a bank replaces its systemonce in 10-15 years. Nonetheless in today’s fast paced environment it isextremely dif ficult for one to judge what the face of market would be afterfew years and hence the bank has to ensure flexibility in the system.
4.3.2 Delta methodology – assessing future requirements
Our research into replacement case studies shows that it is imperativefor banks to take stock of their current operations in the “old world”environment, and comprehend the technology infrastructure andshortcomings. Thereafter, the banks should understand their currentbusiness imperatives and anticipate future needs. These should be the
key drivers for the core banking replacement strategy. Yet, we have
•
•
•
•
•
•
Banks need to initiate the
process by developing clear
business goals
Requirements for core banking
system varies between banks
Business objectives should be
the guiding factor throughout
the replacement project
Delta methodology requires
banks to anticipate future needs
and plan accordingly
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discovered that often banks fail to do so, which results in an expectation/deliverable mismatch at a later stage. This can also lead to unexpecteddelays in implementation and incremental changes in the project.
For this reason, we believe that banks should form a clear understanding ofthe target “new world” and use this to develop a Transformation Blueprintsupported by an Implementation Roadmap. One methodology that thebanks can use is delta analysis. Herein the blueprint and implementationroadmap should define the new world and how to get there, e.g. businessand technical architecture, technology platform, process transformation
and organisation alignment. The Delta Transformation Blueprint shouldbe complemented by a business case and/or a business justification, afinancial impact analysis and a visualisation of the new world.
The biggest challenge a bank is likely to face in the Delta approach isthe scarcity of experienced resources. This approach requires seasonedbanking practitioners with the ability to deal with a clean-slate approach,a good business appreciation of technology and the ability to switchcomfortably between the big picture and the nitty-gritty operational details.
Delta analysis is forward looking and it is driven by three key concepts:
Delta Methodology
Key Concept 1:
New World / Old World
“Leaving the legacy behind”
Key Concept 2:
Delta Analysis
Moving towards a “legacy free” new world
Key Concept 3:
Go / No Go Milestones
“Put a stake in the ground” before proceeding
Source: Imma con SOBIT Methodology
•
•
•
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Delta Analysis
Old World
Old Core Banking
Systems
AS 400
UNIX
Mainframe
New World
New Core Banking
Systems
New
Core Banking
System
The Delta not “ A Gap” w ill driv e the development of the Delta Definiti on Documents
SOBIT Core Banking Implementation Methodology
Reporting
Local Practices
Policies & Procedures
Products
Processes
Stakeholder . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Benefits. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Delta
Analysis
Key Concept 2:
Delta Analysis
Moving Towards A “Legacy
Free” New World
Source: Immacon SOBIT Methodology
Go / No Go Milestones
DesignGo /NoGo
DesignSign-Off
PilotGo /NoGo
DeploymentGo /NoGo
Milestone:Next phase will be kicked
off once previous phase’ssign-off is completed
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
Phase 1: Business Justification & Blueprint
Design Integration
Conduct Delta Analysis
Phase 0: Setup and Initiation
Programme Initiation
System Selection
Phase 2: Selection
Business Realignment
Build
Integration
Test
Phase 3: "Delta" Driven Implementation
Pilot
Phase 4: Deployment
Training
Logistics
Phase
Project will stop untilmilestone is signed off
Go / No Go Decision
Milestones
Project Flow
Project will continue to the next phase
Stop
Go
Key Concept 3:Go / No Go Milestones
“Put A Stake in the Ground”
Before Proceeding
Source: Immacon SOBIT Methodology
• In summary, successful core banking replacement projects we have seenare driven by clear business objectives, a strong business justification,
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a blueprint for the future and a roadmap on how to reach the target – all developed in the first phase of the project. This is followed by aninitial delta analysis in the selection and implementation phases of theproject and the conscious sign-off of project-embedded milestones ineach phase. If one of these milestones is not signed off, the projectstops. This disciplined approach can save the bank a lot of money andagony.
• Key activities to consider for the business justification stage of the project
are:Define the business objectives and desired outcome of the project
Assess the current operations and existing IT infrastructure against thebusiness objectives
Develop and visualise the blueprint of the future state of operationsand the enabling technology
Define the implementation approach and timeline to achieve the futurestate
Formalise the business justification for the future state
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-
-
-
-
Delta methodology would
facilitate business justification
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4.4 Phase 2 – SelectionCritical Considerations in the Selection Process
Considerlong-term strategic
goals of the bank
Develop arating system
detailed toprovide
objective &
subjectiveassessment
Invite bids fromvendors that
have strongexperience in
similar projects,
reputation andtrack record
Eliminate theproducts and
vendors that donot meet the
essential
criteria
Final selectionshould
comprisedetailed
analysis of
vendor and itspartners in the
project
Financialassessment is
important butdecision should
be based on
product andvendor
capability
Project Stages
Identify key
deliverables to
meet long-term
needs
Develop
selection
matrix. Identify
‘Go’ / ‘No Go’
criteria
Develop
Request for
Proposal and
invite bids
Initial filter to
eliminate
unsuitable
vendors
Invite
presentation
from
short-listed
vendors
Financial
assessment
and final
selection
Source: Asian Banker Research
4.4.1 Reasons for replacement
Key Demands from New Systems
Problems with legacy system Demands for new system
Flexible, scalable
Component-based architecture
Competitive edge
Customer-centric with single
view of customer
Easy information access
Higher efficiency
STP ability
Product differentiation easy
Lower operational and
maintenance cost
Lower TCO
Outdated architecture
Lack of flexibility
Lack of scalability
Long product rollout time
Slow response time
Product innovation difficult
High operating cost
High maintenance cost
Scarce trained manpower
Product-centric
Disparate systems lacking
information accessibility
Source: Asian Banker Research
The Phases Of Core Banking Replacement
Identifying the critical currentand future needs to be met by
new system
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The bank needs to consider its objectives and conduct a delta analysisto guide its development of selection criteria for the new system.
Widespread dissatisfaction with ageing, expensive and inflexibletechnology is one of the prime reasons for change. In countries like Indiawhere private sector banks boast technically advanced systems, it hasbecome imperative for public sector banks to replace their systems as wellto lower the attrition rate and survive in this competitive environment.
Many banks have decades-old legacy systems that either fail to support
the latest products or do so with complex and time-consuming effort. Theoperational and maintenance costs are steep and available manpowerfor maintaining them is dwindling. According to one vendor, ”Just keepingthese systems running can often consume more than 70% of the ITbudget, leaving little money to gain advantage over competitors.”
While these systems have been stable, they are highly inflexible andhence largely unsuitable in today’s competitive environment. Many ofthese systems were implemented at a time when banks did not engagein fee-based transactions. Rather than being customer centric, they arelargely account centric.
Branches need excess staff to maintain systems and back-of fice functions,thus adding to cost. The time required to bring a product to the market,the speed of transactions and end-of-day processing requirements havealso forced banks to look for alternatives to legacy systems.
Information in many of the legacy systems is stored in independentsilos. This makes gaining insight into customer needs and integratingcustomer information across functions extremely dif ficult, as these involvethe collation of a large amount of data from disparate systems held indifferent formats. For example, in legacy systems, a credit card divisionmay not know about the customer’s savings account. The banks that stillhave no centralised customer-centric system are realising it is essentialto acquire one as this would provide them with a single customer viewand easily accessible and deployable real-time information, therebyimproving the banks’ ef ficiency across functions.
The aim is now to eliminate duplicate systems, integrate legacy andsub- systems with middleware, install and integrate databases and addapplications. The banks need to adopt scalable and flexible systemswhich can meet multi-channel delivery requirements, can integrateinformation and processes across the organisation, are easy to upgradeand can adapt to changes. This is essential to meet consumer demandsand maintain competitiveness in the sector. Absence of an adequate
system could even hamper the viability of an organisation.
•
•
•
•
•
•
•
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4.4.2 Considerations in determining selection criteria
Focus of Banks with Regard to Selection Criteria
54
3
21
Business Direction/Goals
Scale and Complexity of
Operations
Product Features
Cost/Financial ImpactBusiness Culture Process
Human Resources
Existing System/
Technical Capacities
Ideal Bank
Average Bank
Legend
Source: Asian Banker Research
Scale of 0 to 5 measures level of importance
(0 = Not important at all, 5 = Very important)
Selection of the system is a strategic decision which can impact not just the growth and financials of the organisation but even its viabilityand competitiveness. Therefore it is essential that banks select thesystem that provides the right components and architecture to meet theirobjectives.
The architectural components that can meet the functional requirementsof the bank, given its business goals, must first be mapped out. Thiswould also determine whether the bank should replace the core bankingsystem in a few functional segments (or geographic locations) or go fora complete replacement, and whether it needs to replace just the corebanking system or the front end and GL as well.
We believe existing system and technical capabilities would be a decisivefactor in evaluating whether to upgrade the existing system or replace.Gap analysis for features such as scalability, flexibility, availability ofhuman resource, costs and processes of the existing system woulddetermine the technical capabilities and type of architecture requiredof a new system. Integration of the new and existing systems withinthe bank and the problems therein would also determine the systemarchitecture required and the risks involved in the change process.
The complexity and scale of the bank’s operations would shape itsscalability and flexibility requirements for the architecture and platform.
For example, a large retail bank may prefer mainframes due to reliability
•
•
•
•
Critical factors that determine
the selection criteria
The bank needs to developselection criteria based on
its unique requirements and
business objectives
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and scalability. Multi-channel delivery, high transaction volume and usercompatibility with lower downtime would be critical considerations. Asmall bank, on the other hand, may prefer a UNIX solution because ofavailability, flexibility and agility.
Finally, the right technology should come at the right price. Cost andfinancial impact are critical inputs in system selection. Most systemsrequire heavy investments but these ideally should translate into costssavings and revenue growth in the long term. For a smaller bank withlimited resources, cost may be a more decisive factor than in a bigger
bank.
4.4.3 Key considerations in vendor selection
Focus of Banks in Assessing Core Banking System Vendors
54
3
21
Track Record
Product Functionality
Cost / Financial Impact
ReliabilityCommitment to Business
Financial Viability
Ongoing Support
Ideal Bank
Average Bank
Legend
Source: Asian Banker Research
Scale of 0 to 5 measures level of importance(0 = Not important at all, 5 = Very important)
Banks cannot bring about transformation in their systems alone. Mostbanks see a core banking project as a highly risky proposition, so theywould invariably like to partner a vendor whom they can trust and believeto have the ability to handle a project of that size and nature. The vendorsare generally solution providers and, in most cases, service providerswho implement the solution within the banks. The two often join handswith a hardware supplier to form a consortium to bid for the project.Where there are multiple vendors, banks need to decide who would bethe prime vendor.
The evaluation of vendors involves multiple assessment criteria, foremostbeing delivery track record, financial viability, technical capability, product
features and cost.
•
•
•
Critical considerations in
assessing IT service providers
Evaluating vendor track recordand financial viability is a must,
but equally important is for the
bank to assess its comfort level
with the vendor’s ability
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Banks need partners that have the proven track record to provide themwith the right product and service mix. There are relatively few vendorsthat have successfully completed core banking projects of the size andcomplexity of tier 1 banks. But for tier 2 and tier 3 markets, there ismore competition. The IT partners’ track record and reputation should beevaluated in the context of the banks’ unique requirements. For example,banks in China look for customisation and localisation capability. Similarly,Indian banks have shown a preference for local vendors.
In addition, the IT partner’s financial strength (to ensure long-term
viability), ability to continually upgrade products and track record in post-implementation services are critical factors for lasting success. Investinga huge amount of resources on a product is useless if the vendor whoprovided it is no longer around to service it a few years later.
The alliances and relationships between the IT partners are otherfactors that need to be considered. For example, State Bank of Indiaand Central Bank of India who both hired TCS as their system integratorwere provided with a system from FNS, now owned by TCS, andhardware from another vendor. The standing relationship between thesetwo companies was a definite plus in their favour.
4.4.4 The right architecture and platform
Critical Requirements from System Architecture
Flexible,
Scalable,
Stable
Modular,
Integration
Customer-
centric,
Single Viewof Customer
Straight
Through
Processing
Service
Oriented
Arc hit ectu re
Critical Requirements From System Architecture
• Ability to meet the long-term growth and ambitions of the bank
• Component-based structure that can be modified and developed with ease
• Integrated customer information to facilitate better customer relationship across functions
• System functionality to support global deployment
Source: Asian Banker Research
Banks have to select the right architecture for the banking system in
general and the core banking system specifically to suit their unique
•
•
•
•
Vital to assess vendor’s
financial strength for long-term viability and technical
enhancement
Understanding the need for the
right architecture
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requirements. Most banks today are shifting their systems to attain moreflexibility and scalability, similar to moving out of the confines of a smallbox. What they need to ensure is that the new system is not like a biggerbox which quickly becomes a constraint again in a few years’ time.
Flexibility – With a convergence of financial services and a highlycompetitive environment, banks need to display a high degree offlexibility, agility and ef ficiency in its processes and product andservice development. Whatever the platform and solution that a bankselects, it has to be flexible to meet the constantly changing bankingrequirements.
Scalability – Scalability is a particularly important factor for retailcommercial banking. A bank can expect healthy growth rates in thissegment of the market and must plan for an increase in transactionvolume. Another factor to consider is the bank’s strategy in terms ofproduct offerings and delivery channels.
Functional requirements – It is essential to have a comprehensive MIS(management information system) to cover all products, all customergroupings and all geographical locations. In addition are customised
requirements such as multi-channel, multi-time-zone and multilingualprocessing ability to meet the specific needs of a bank. However thebank has to determine which of these needs require changes in the frontend and which demand core banking replacement.
Modularity – We believe that the system architecture has to be modular.This means that one part of the system can be changed without affectingother parts, thereby enabling banks to easily change and enter intoparticular segments of operations. For long-term ef ficiency, banksneed to transcend relationships and dependencies across systems andbusiness units through integrated technology.
Straight Through Processing (STP) – One key feature which has ledto the success of core banking systems today is front- to back-of ficestraight through processing. While this is essentially the ability to havea series of underlying business events generate multiple accountingevents without having to physically transfer the data from point to point,this translates into a substantial decline in cost of ownership and controlbecause of the need for less reconciliation. Further, it allows banks toreduce manual intervention and redeploy their existing resources.
The architecture of the banking system should integrate the corebanking system such that there is customer centricity with a single viewof customers across functions. In a customer-centric environment, the
•
•
•
•
•
•
The functionality and
architecture of the system
along with its suitability to meet
business goals would be the
key concerns
Imperative for banks to have
modular architecture with STP
and single view of customer
Integration of core banking
system within the banking
system architecture equally
important
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consumer is paramount and drives all business decisions from technologyto organisation structure.
Business Process Modelling (BPM) is mainly a mechanism for theorchestration of processes, with its ability to precisely model andpossibly change the context in which enterprise components are used.Convergence of SOA and BPM is vital to the implementation of SOA-based core banking solutions.
Service Oriented Architecture (SOA) is a relatively recent addition to the
architecture of banking systems. SOA in its purest sense is centred onloosely coupled components which support generic services and arebased on web technology. In a core banking context, it means reducingbarriers in antiquated infrastructure and creating real-time integration ofdisparate systems and sharing of databases within a flexible and easilyupgradeable infrastructure.
Those components should be flexible so they can be reused or combinedto create new business functions both within and across enterprises.They should embody best practices and should enhance the bank’sability to outsource and extend processes to business partners. The
generic nature of the components means they are intended to traversesilos and departments, thereby facilitating the breakdown of barrierswhich only exist for historical, technical and antiquated organisationalreasons. We discuss SOA in more detail in section 5.
Selecting the Architecture
Most mainframe-based core banking solutions are designed for rawhorse power. The idea here is to support high transaction volumes.Core banking solutions built on other platforms are typically focusedon functions and features and do not offer the same level of stability,availability and end-user response time. While these types of solutions
usually cater to small- and medium-sized banks, they have recently beentouted to larger banks with some success.
Other mid-range solutions were initially built for the wholesale marketand then repackaged as “Integrated Universal Banking Solutions” forthe broader banking market. Some of those integrated solutions areimpressive in terms of functions and features, extending beyond depositsand loans to include treasury and trade finance products and providinga common customer information system across the package. However,these solutions need to be carefully assessed with regard to their supportfor the bank’s branch network, which differentiates a universal bank fromthe traditional wholesale banking operations for which these systems
were initially designed.
•
•
•
•
•
SOA critical for future flexibility
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Selecting the Platform
An important consideration for the replacement of a core bankingsystem is the platform upon which the solution will operate. Typically,banks choose between mainframe and UNIX platforms for their corebanking environment. This decision should be made after the conclusionof the RFI (Request for Information) process at the latest, so that theRFP (Request for Proposal) is issued only to vendors with solutions forthe selected platform.
The platform decision is critical as it can automatically exclude certainplatform-specific core banking systems. To the business user, this mayseem counterintuitive; after all, it is the core banking system we want toselect. However, as explained earlier, the functions and features of thecore banking system are not the sole determinants of the appropriatesolution. First, the solution must be able to handle the bank’s requirementsfor volume, availability, reliability, scalability, security, response timeand other non-functional qualities. For these, the choice of platform isparamount.
There are many aspects which should be considered in platform selection
for mission critical systems:
Virtualisation of the resources of computer operations – Resources inthe platform of choice should be virtualised and centralised, enablingbetter management of the operations. A key consideration should bethe level of distribution of these resources across various systems.Distribution of resources over a large number of servers can lead to anunacceptably high level of complexity, especially in an “open system”environment, due to the ever increasing number of servers required tomaintain the scalability of such systems.
High availability – Using parallel sysplex or geographically dispersed
parallel sysplex, the mainframe is able to achieve availability of upto 99.999%. Alternative platforms should be measured against thisbenchmark. This will facilitate clear decision-making and buy-in of allstakeholders when faced with lower availability guarantees.
Security – Security has always been a concern for banking systems.The mainframe platform enables the bank to manage security froma single point instead of multiple systems and thus helps reduce thesecurity risk exposure. However, as the security infrastructure fornon-mainframe environments is constantly advancing, banks shouldconsider the available security components as part of the overall costof either platform option.
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Platform cost – Typically, platform cost is calculated as either total costof ownership or total cost per user. However, measuring total cost is notstraightforward and often results in an underestimation of UNIX costsdue to lower overall availability and the greater number of unplannedoutages. We have, for example, found that the average expectedrevenue loss per hour of system downtime could amount to well over$1 million. Considering that unplanned outages can occur as often asonce or twice a month, the costs can climb quickly.
In summary, we believe that the total cost should not be the drivingfactor in platform selection for a retail bank. For a mission critical system,considerations such as availability, scalability, reliability and security areof far higher priority. Cost should only be a barrier for banks that cannotafford the most suitable platform and are willing to compromise on theservice level of a mission critical system.
On the other hand, for small wholesale banks and banks that do nothave large transaction volumes, the UNIX platform could prove to beeffective. Given the technical advancement in UNIX systems in recentyears and the increased availability of UNIX hardware, software andtechnical skills, UNIX is rapidly becoming a preferred choice for smaller
banks and new banks. As these banks have only a handful of branches,limited multi-channel requirements, lower security requirements andtolerance for unplanned system downtimes once or twice a month, theprice-performance equation here makes the non-mainframe solutions aviable option.
However, for those banks that intend to shift from mainframe to UNIX, orvice versa, the switching cost and the cost of coexistence of two systemsneed to be added to the total replacement cost.
4.4.5 The selection process
Objective: Select and acquire the enabling technology and serviceprovider.
-
•
•
•
Cost should not be driving
factor; identify what is mostsuitable based on needs
For smaller banks, UNIX could
prove to be effective but banks
need to consider switching cost
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Core Banking Selection Process
Sign Off
Issue RFI /
Refine Vision
Issue RFP
Select System
& Service
Provider
Conduct
Negotiation &
Contracting
Business
Justification &Blueprint
Selection“Delta Driven”
ImplementationDeployment
Project Stages
Source: Immacon SOBIT Methdology
Selection of the right core banking solution is critical for the success of aproject. We have seen retail banks selecting a wholesale core bankingsolution and wholesale banks selecting a core banking solution meantfor retail banks. We are also seeing more and more bankers attemptingto make technology decisions, deliberating about Java versus Cobol,UNIX versus mainframe, SOA, etc. Needless to say, the outcome of
such decisions is often sub-optimal.
It is important that bankers focus on business solutions and not on atechnology solution. However we believe that business should have thefinal say on the solution, and the choice should be based on businessneeds and not technology considerations. It is also important during theselection process that IT first picks out proven core banking systemsand then considers their underlying technology platform, programminglanguage and tools, not in the reverse order. We believe that a failure todo all this can lead to very costly errors.
Issue RFI / refi ne vision – If time allows, the selection process should
start with a Request for Information (RFI). The RFI should be keptsimple, concise and open-ended. As the name implies, the objective ofthe RFI is to obtain information for deciding on the final shortlist to kickoff the Request for Proposal (RFP) process. If the RFI contains too muchdetail, it can render the RFP process obsolete and make the preliminaryanalysis in the RFI stage very laborious. As the bank has to analyseand weigh the RFI responses, it is important to keep the workload of thereviewer to a manageable level.
A brief, well-written RFI (and RFP) addressing the critical points thebank is interested in would be more worthwhile for the bank’s reviewersand management, than a long “laundry list” of functions and featureswhich describes more or less the existing system of the bank and not
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•
•
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the future. The RFI process should focus on the essential requirementsfor the future, bearing in mind that quantity never replaces quality. At theend of the process, 2-3 finalists should have been shortlisted for an in-depth review during the RFP stage.
Issue RFP – An RFP is issued after a shortlist has been prepared. At thisstage, the choice of platform should already have been made. The RFPshould concentrate on the requirements for the new world, and shoulddemand full compliance with the bank’s visualisation or at least a briefdescription of what requirements cannot be met by the core banking
solution and for what reason. The RFP should not be sent to more thanthree vendors for a major component such as trade services, multi-channel delivery and core banking. By now, the bank should also havean understanding of how the selection would be conducted and know ifit is necessary to obtain a proof of concept. Ultimately, the key drivershere are cost and timing. Where a bank can afford the money and time,a pilot of the new solution is recommended. To achieve an objectiveassessment, many banks are using a scoring method to document andtabulate the results. See Appendix 2 for more on RFP.
Select system and service provider – A sub-optimal selection will
have dire results for all. One of the challenges the selection team facesis that they have to not only select the vendor but also justify why thisvendor was chosen over others. Hence, it is important to have a solidand transparent selection process in place. In addition, it is crucialthat the selection is conducted for “new world operation” and does notdegenerate into a selection of “the emperor’s new clothes”, e.g. wherelegacy operations are deployed with new technology. Our analysisshows that successful organisations avoid taking legacy baggage intothe new world.
Conduct negotiation and contracting – This stage is completed withan agreement on final pricing and contractual arrangement with the
vendor and service provider.
To summarise, the selection phase starts with gathering of informationand shortlisting of solutions for the subsequent RFP process. This allowsthe bank to refine its assumptions about the future-state vision based onfindings during the RFI process, and sets the stage for developing acomprehensive RFP for the shortlisted vendors. Upon receipt, the RFPresponses are evaluated as inputs for the selection of the final vendor.This whole process is completed with the conclusion of negotiations onpricing and contractual arrangement.
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•
•
•
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4.5 Phase 3 – Implementation4.5.1 Key challenges and critical success factors
Key Challenges During Implementatio n
• Integrating with an ageing existing system with limited information
on software code
• Data migration and seamless and smooth transition with zero error
• User training and coping with resistance to change in processes
and work culture
• Localisation and customisation of solution to suit the unique
requirements
• Matching expectations and deliverables
• Incremental changes leading to cost and schedule overruns
Source: Asian Banker Research
Critical Success Factors
• Strong management support and initiative within the bank
• Execute large projects in phases; develop pilot projects
• Adequate and thorough testing at every level
• Banks to have strong internal steering teams with good leadership,
communication skills and technical knowledge
• Ready helpdesk for user enquiries and complaints
• Vendors should involve people with requisite expertise andknowledge of local business
• Select strong partners in implementing project
Source: Asian Banker Research
Core system replacement or even upgrading is a major challenge thatcan create disruption of service, customer dissatisfaction and employeedisappointment. Transition from one system involves not just technicalcomplexities but a plethora of unforeseen problems in areas such asmatching of expectations and deliverables, adaptability of system within
the organisation and change management.
•Seamless and smooth
transition to new technology
and processes with zero error is
the key challenge
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The foremost challenge is data migration and seamless transition to thenew system. This includes the dif ficult task of data cleaning, as somedata may be very old and irrelevant. Mass migration requires largecapital investment and an implementation schedule stretching overseveral years. It also poses a significant risk of service interruption thatcan cause a dip in customer satisfaction.
There can be various problems in the process. For example, the oldsystem may have been account-based and not customer-based,requiring information to be collected from multiple systems and migratedto a centralised location. Some banks put in their system more than 15years ago and the people who implemented it are no longer with thebanks – such systems are undocumented and hence make the projectmore challenging.
For some projects, the coding of ageing systems may be unknown,making data migration and integration a rather dif ficult proposition.For example, when Korea Development Bank switched from an IBMsystem to an FNS system, it involved shifting to a totally new systemarchitecture. In other cases, the bank may be shifting to a new platformwhich demands coexistence of two platforms for a certain period of time
and a huge data conversion exercise.
Customisation of the system to meet the unique requirements ofindividual banks is another critical area where things could easily gowrong and lead to an expectation/deliverable mismatch. While rollingout a time-consuming project, there may be developments in the marketor a realisation of the need for increased functionality which demandfurther customisation in the product. As the implementation period getsextended with these incremental changes, the project becomes morelikely to have cost overruns. This is where the sign-off at each stagewould be of immense help.
The project at some stages may just seem too big in scope and magnitude.But ensuring that any changes do not lead to unnecessary delays andcost overruns is essential. Motivation will decline while resistance willincrease day by day. Managing these emotions and ensuring that theproject is not viewed as just an IT project would be a big challenge.
The most critical success factor in implementation is thus to test atevery stage. Banks should develop pilot projects, divide large projectsinto phases, and conduct user acceptance tests or, rather, businessacceptance tests to ensure a match between deliverables andexpectations. Also critical is having strong internal teams with good
communication skills and decision-making capability. There should be
•
•
•
•
•
•Testing at all levels is the most
critical means of risk reduction
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a strong steering committee with a clear objective to guide the project tosuccessful completion.
In addition, it is important to provide user training and manage resistanceto the change in processes that accompanies such a project. Thereshould be helpdesks ready to handle enquiries and complaints fromusers – which are likely to be plenty. Along with processes, the workculture would also have to be changed to ensure optimal returns fromthe project.
Banks need to develop a detailed schedule of implementation andensure its strict adherence at all levels. For a large bank with hundredsof branches, the project will be a multi-year initiative. Take the exampleof State Bank of India which is implementing its system across 8,000branches. Despite taking on 40-50 branches per day, the bank expectsto finish the implementation only by April 2007, four years after itscommencement in 2003.
In many such projects, trained manpower for new systems may not bereadily available within the bank. It is for this reason that some bankshave resorted to outsourcing their manpower. But the banks need to
remember that a few experts with the right experience and knowledgemay prove to be more useful than an army of staff.
Finally the bank’s business environment, adaptability to changeand commitment to the project are vital for success not just duringimplementation but also during and after deployment. Vendors shouldensure that management is involved in the project from conception tillfinal deployment. We cannot stress enough the importance of strongmanagerial support and business ownership for a replacement projectwhich could go miles in motivating people in the organisation to achievesuccess.
4.5.2 Implementation process
Objective: Operationalise and pilot the transformed future state, includingtechnology, process and organisational change.
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•
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Core Banking Implementation Process
Sign Off
Delta AnalysisDetailed
Design
Build & TestPilot
Implementation
Business
Justification &Blueprint
Selection“Delta Driven”
ImplementationDeployment
Project Stages
Source: Immacon SOBIT Methdology
Transformation Approach and Methdology
Phase 1:
Delta Definition
Programme Management & Project Control
Phase 2:
Design
Phase 3:
Build & Test
Phase 4:
Pilot
Identify Organisational Change -Determine the changes needed to fitthe organisation to the new System.
Identify Essential Modifications to
the new System - Every effort shouldbe made to avoid changes to the newSystem but rather to align thebusiness to the new system. Changesto the new Core Banking Systemshould be limited to those essential inorder to meet regulatoryrequirements.
Identify Integration Delta -Determine the interfaces, conversionmodules and coexistencedevelopment required to integrate thenew System into the bank’senvironment.
Business Realignment Design -Define the reengineered productsand services and businessprocesses aligned to the newSystem.
System Design - Prepare thedesign for system configuration.
Also design the unavoidablemodifications identified during theDelta Analysis.
Integration Design - Prepare thetechnical design for the Interfaces,
Data Conversion Modules andCoexistence Modules.
Business Realignment - Align thebank’s products and services to thenew System. Also align the bank’sprocesses and procedures to thenew System.
Configure & Customise -Configure the system as needed,effect the necessary changes to theorganisation, and make changes tothe system, where absolutelynecessary. In addition, the interfacesbetween the new System and the
many linked systems are created.
Testing - Perform various levels andtypes of testing to the new systemand processes etc. in preparationfor correct functioning in the liveenvironment.
Training Preparation - Preparetraining plan, materials and coursetrainers.
Pilot Preparation - Identify and
prepare the pilot site, train the pilotusers and conduct rehearsals toprepare for the actual cutover.
Pilot Go/No Go - Confirm thecompletion of Pilot Preparationactivities and readiness for cutoverof the new System to the Pilot
community.
Pilot & Fine-tune - Cutover the Pilotsite and users to the new System.Identify and fix problems that did notarise in the testing environments.
Delta Analysis Report Design Specifications Applications Ready For Pilot Appli cations Ready For
Deployment
Source: Immacon SOBIT Methdology
The core banking implementation phase can be divided into four distinctstages. We came across an interesting concept of delta analysis.
Delta Analysis – A delta analysis is the identification of differences (the“delta”) between the desired state and the selected package, and waysto resolve these differences. One objective of the delta analysis is toidentify the package modifications required to address country-specificregulatory requirements. The package modifications are necessary ifconfiguration through package-embedded parameters is not possible.For the remaining delta, there are a number of resolution optionsavailable, such as:
•
•Implementation process
involves delta analysis,
detailed designs and product
modification to meet the bank’s
requirements
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a. No change / Out-of-the-box fits your needs
b. Rationalise process
c. Rationalise product
d. Customise and modify package
The chart below illustrates this approach in more detail:
Requirements Analysis Chart
Delta Analysis & Resolution
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Start :
Process / Appraisal
Identify Regulatory
RequirementsI de nt if y D el ta D el ta Resol ut io n
Option I:
No change /
Out of the box fits
Option II:
Rationalise
Process / Product
Option III:
Modify package
Customisation
Input on Package
Cost ImpactNo (should be included
in base price)No No
Yes (Time & Material
Cost for Modification)
New Core Banking
Solution Procured
Regulatory
Modification
New Core Bank
Capabilities
New World
Operations
Delta
+
Delta
Resolution
Accept Package
Change Bank Product / Processto Match Package
Modify Package
DeltaRegulatory
Modifications
© Immacon SOBIT Methodology
Source: Immacon SOBIT Methdology
Some of the recommended activities to consider for this stage of theproject are:
Conduct a delta analysis to identify the differences (the “delta”) betweenthe required future state and the selected solution
Conduct a “solutioning” to determine the appropriate customisation orrefinements to suit the future state
Define and estimate interface, data conversion and coexistenceefforts
Typical deliverables of this task include: Delta Definition and Resolutions,Configuration Definition, Interface Definition, Data Conversion Definition
and Coexistence Definition
-
-
-
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Detailed Design – A detailed design of the future solution is needed forthe subsequent Build & Test stage of the project. A detailed design doneright can save a bank a lot of time and money by avoiding unnecessaryrework and change requests. Many projects run into dif ficulties becausethe design is never stable. In those projects, coding starts even beforethe detailed design is approved. In our analysis, this is one of the majorcauses of project failure, i.e. the inability to complete and sign off detaileddesign documentation. The detailed design documentation shouldinclude the following, among other things: business design, systems
design, interface design, data conversion design and coexistence design(assuming no big bang deployment).
For this stage of the project, the initial project blueprint needs to beexpanded and some of the recommended activities to consider are:
Prepare a detailed business design, including rationalised product andprocess designs.
Prepare a detailed system design for customisation and configurationof the selected solution.
Prepare a detailed integration design for the interfaces, data conversionand coexistence components.
Build & Test – The customisation and configuration of the selectedsolution begins here. At this stage, it is important to freeze the designand to apply a rigorous change management process to any unavoidablechanges. Hence, the sign-off of the detailed design documents of theprevious stage is compulsory before this stage begins.
At this point, we would like to caution that the term “user acceptance test”should not be taken literally. The real end-user should not be responsiblefor “acceptance”. What the bank needs is a trained test team of, perhaps,
former users who understand and appreciate the need for thoroughtesting and know how to conduct systems testing. Generally the realend-user does not have these skills. Hence, we prefer to use the term“business acceptance testing” or “business solution testing” over “useracceptance testing” to avoid confusion.
Some of the recommended activities to consider for this stage of theproject are:
Customise and configure the selected solution
Prepare operational manuals, training materials and train-the-trainer
programmes
•
-
-
-
•
-
-
A detailed design done right
can save the bank substantial
time
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Customise and configure the interface, data conversion and coexistenceintegration components
Prepare and conduct system, operations and business solutiontesting
Pilot – A live pilot is the final “acceptance” test. No matter how hardwe try, we will never be able to fully recreate and test a system in alab environment. But during a live pilot, the system can truly be testedfor real-life usability. Of course, the pilot should be representative of
the bank’s core operations. We have seen projects with well-executedtesting run into trouble as the test and production environments weredifferent, and even in cases where the production environment itselfwas used for bank-wide testing by the actual end-users reposting realbusiness transactions prior to a big bang deployment. The lesson learnt:the final test is the live environment.
Our recommendation is to use a manageable mid-size branch for thepilot. The pilot should always include a month end, as most banks havespecial month-end processing which can cause a lot of disruption ina real-life operation if not managed appropriately. The pilot should be
used to assess the effectiveness and completeness of the end-usertraining and the new business processes and procedures, as well as thecustomers’ acceptance of the new products and new operation. It shouldalso be used to identify bugs and bottlenecks and ultimately to fine-tunethe applications before deployment on an enterprise-wide scale. Thisstage of the project will deliver a “future state new world operation” in alive environment. Recommended activities to consider for this stage ofthe project are:
Plan and prepare for the pilot deployment, including training of the pilotusers and dress rehearsals of the pilot cutover and operations
Deploy, support and refine the pilot operation
-
-
•
-
-
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Reference Implementation Methodology
A comprehensive implementation method may be the one that follows:
Comprehensive Implementation Chart
Configuration Definition
Interfaces
Data Conversion
Coexistence
ProductRationalisation
System Change
SystemCustomisation
SystemConfiguration
ConductGap
Analysis
Resolution
Business ChangeDelta Analysis
Configuration Analysis
Integration
Process
Rationalisation
PilotPlanning
Train Pilot Users& IT Ops
Pilot SitePreparation
Dress Rehearsal
ConvertPilot Data
Pilot End-userSupport
ApplicationSupport & Fixes
Pilot
3 PilotGo/No Go
Update ProcedureManual
Prepare User
Guides
LocalCustomisation
CoreCustomisation
SystemConfiguration
Interfaces
Data Conversion
Coexistence
Prepare Training Plan
Prepare TrainingMaterials
Train-the- Trainers
SystemIntegration
Testing
Operations Testing
BusinessSolution Testing
Business Build
System Build
Integration Build
TrainingPreparation
Testing
Product Designs
Process Designs
Local CustomisationDesigns
Core CustomisationDesigns
Configuration Designs
Interfaces Designs
Data Conversion Designs
Coexistence Designs
Business Design
System Design
Integration Design
2 Sign Off Design1 Sign Off Delta
Phase 1:Delta Definition
Phase 4: PilotImplementation
Phase 3:Build & Test
Phase 2:Design
Source: Immacon SOBIT Methodology
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4.6 Phase 4 – Deployment4.6.1 Deployment process
Objective: Enterprise-wide rollout of the refined future state operation.
Core Banking Deployment
Sign Off
Business
Justification &Blueprint Selection
“Delta Driven”
ImplementationDeployment
Project Stages
TrainingChange
Mgmt &
Comm
Go Live Fine TuneLogistics
Source: Immacon Research
After the successful completion of the pilot, the bank is ready to executethe roadmap for deployment of the pilot operation to the whole enterprise.To do this, a number of important planning tasks need to be updated andfinalised:
Logistics – Managing logistics is critical for the rollout of a new corebanking solution to the branch network. The logistics include rolloutsequence (where, when, how many), possible changes to branchlayout and bank image, and update and/or replacement of hardwareand infrastructure software. It also includes the planning and executionof training logistics for the enterprise-wide deployment. The bank may
need the hardware to rapidly build and dismantle mobile training branchenvironments for hands-on systems training.
Training – We have discovered that once the new core banking system isready for rollout, training is one of the most important activities requiredto successfully deploy the new world on an enterprise-wide scale. Todo this, the bank’s project team must fine-tune and update the trainingplans and materials taking into account the lessons learnt from the pilotdeployment.
Change management & communication – We have found in ourassessment of successful re-engineering and transformation projects
that effective change management is essential to obtain buy-in and
•
•
•
•
Enterprise-wide rollout of
the system poses critical
challenges, demanding careful
planning and caution at each
stage
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acceptance of the new operation throughout the enterprise.
Change management done right is a very involved programme touchingevery level of the organisation, from the CEO to the end-user in thebranch. Successful change management for a project as complex,high risk and high profile as a core banking enabled transformation canultimately only be led by one person: the CEO. The chief executive issupported in this task by the entire senior management team of the bank.It is critical here that management not only walks the talk but also leadsby example.
Communication of the change is divided into two parts: internal andexternal. Our analysis shows that the effectiveness of the communicationcan be significantly enhanced through the use of multimedia technology.Usage of these tools ensures consistency in the message and rapiddeployment to the enterprise and public alike. The bank will needdifferent communication programmes depending on the audience theywant to address.
Go live – We have seen that successful deployment is normally conductedthrough a carefully prepared rollout plan which clearly identifies the timing
and sequence of each task. The rollout is undertaken by specially trainedrollout teams which, among other things, conduct a “train the trainer”programme in their respective rollout clusters. A best practice analysis hasshown that it is more effective to train “key branch employees” as trainersfor their respective units, than make “external” trainers responsible forthe training deployment. This approach is an integral part of the changemanagement programme and fosters ownership and accountability.The employees are likely to pay more attention to the tasks if they knowthat they will have to train their peers and be accountable for all of thepredefined deployment activities.
The implementation teams are usually supported by a 24/7 central
command centre, which coordinates and directs all implementationactivities and has one or two rapid deployment teams available to bedispatched to support trouble spots. The drawback of this approach isthat banks will be required to do a lot of methodical planning, conductmassive training of key and branch employees and be held accountablefor the results.
Fine tune – The final activity in the deployment stage is the fine-tuningof the operation based on feedback received during deployment.Successful organisations have gradually turned this fine-tuning activityinto a continuous improvement programme managed and led by former
members of the rollout team.
•
•
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4.6.2 Deployment approaches
Comprehensive Implementation Chart
Complete End to End
Partial Replacement
Big Bang ApproachGradual Implementation
Integrated solution suitable more for small
and medium banks
Easier to integrate solution from single
supplier
Phasing of implementation process
reduces risks
Suitable more for smaller banks
Risks and complexity higher
Implementation more challenging
Sudden change in processes and culture
within organisation
Preferred approach by large banks due to
complexity and scale
Lower risk, phased shift in processes
Challenging to have two systems coexist
during implementation
Difficult to integrate multiple systems
This approach can be used for smaller as
well as bigger banks
Partial replacement less complex as it is
for specific functions / locations
Big bang approach can be challenging,
particularly for big banks, but is quicker
Source: Asian Banker Research
The replacement approach is actually dealt with by the bank duringthe project planning stage, but we discuss it here as it has a directbearing on the mode of deployment. The question foremost in the mindof bankers as they decide to replace their banking system is: shouldsystems be upgraded piecemeal or through an integrated end-to-endsolution? Banks vary in their choices. Some want to replace the corebanking system of all geographic locations along with other operationssuch as treasury through a universal or end-to-end integrated solution.Others adopt the best-of-breed approach by selecting separate softwaresystems and vendors for different operations or geographic locations.The selected replacement approach then determines the choice of
vendor and systems and thereafter the deployment approach.
We strongly believe that for core banking systems, there should be onlyone vendor or else there would be immense integration issues. Forthe front end and back of fice, there should also be a single vendor ifpossible, though the project may be divided into smaller parts. Howeverwhen it comes to replacing banking systems across geographic locationsor across operations (retail, wholesale, treasury, etc), we suggest thefocused approach for bigger (tier 1) banks primarily because of thecomplexity of the process. The banks would be able to reduce thecomplexity and mitigate the risk by breaking down the process into
smaller projects, provided integration issues can be resolved.
•
•
The replacement approach
We believe focused, rather than
integrated, projects are more
suitable for bigger banks
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On the other hand, universal solutions may be more feasible forsmaller banks mainly due to the lower scale of the project. End-to-endreplacement has its pluses as integration would be less of an issue, itavoids successive disruption of services and it provides a standardisedtechnical capability across functions.
While deciding on the replacement approach is easy, deploymentis probably the most dif ficult and challenging part of a core bankingproject and can be accomplished through multiple approaches. The twoextremes are “big bang approach” where the entire system goes liveat the specified time and “gradual/phased implementation” where theprocess is divided across various functions, locations or branches.
The choice of approach may vary depending on the complexity and scaleof the project. “Big bang” is the quickest but also riskiest due to its lowerror-tolerance level. If the bank favours this option, then it has chosento go live with its new core banking system and auxiliary solutions (ifany, e.g. multi-channel delivery) at the same time. The advantage ofthis approach is that it is fast and does not require any coexistenceplanning.
The justification for big bang comes from the fact that it is dif
ficult fortwo separate systems to coexist and from it being a faster approach.
The disadvantage is that it requires extensive training and plenty of full-scale dress rehearsals for the entire organisation. Should any seriousproblem occur, the bank has only one option: to fall back on the old corebanking solution. If such a problem occurs more than a week into thecutover, the bank will have serious trouble as the fallback option mostlikely does not exist anymore.
For smaller banks, this approach is possible and even feasible. But forbigger banks, particularly for banks spread across countries, we believethat a total big bang approach is not only high risk but also rather dif ficult
to implement. Examples of recent big bang deals include Union Bank ofPhilippines and Industrial Bank of Korea.
We believe the gradual approach, which is essentially step-by-stepreplacement, should be the preferred mode of implementation amonglarge banks as the complexity and risks in the process are lower. Aphased implementation also deploys the entire core banking solution inone big bang similar to the enterprise-wide big bang.
The key difference between a phased implementation and an enterprise-wide big bang is that the phased implementation is conducted in stages,in successive deployment clusters which are closely controlled and
•
•
•
•
•
•
•
The deployment approaches
“Big bang” is the quickest but
also the riskiest
Gradual implementation should
be the preferred mode among
bigger banks
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monitored. The advantage of this approach is that the entire solution isdeployed at once and can be tested and fine-tuned in a tightly controlledenvironment. Should there be any problem, it can be confined to thecluster. We also recommend that the first cluster is deployed as a pilot,to test not only the new core banking solution but also the conversionand coexistence strategy. The disadvantage of the phased approachis that it takes longer than the enterprise-wide big bang and it requirescareful planning for coexistence and logistics.
We believe that the advantages of phased implementation far outweighthe disadvantages. If risk mitigation is important for the bank, thenthe phased approach is worth a serious look. Gradual implementationleads to a phased change in the processes and working environmentof the organisation, making the change slower and less likely to meetresistance.
In conclusion, the big bang approach is the most risky option a bank canchoose. Big Bang is only recommended for small banks, or for caseswhere the bank is implementing a solution which has already beencustomised for its country and implemented here many times. Solutionswhich have not been customised for a specific country or which are
implemented as part of a core banking enabled transformation are, inour opinion, not a good choice for a big bang implementation.
•
•
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4.7 Risk MitigationInherent Risks in Each Stage of the Project
• Assessing the technical
and functionalrequirements of the bank
• Ensuring adequatefinancial, business and
management support forthe change
• Financial viability to
provide long termrelationship and
technical support
• Experience in
successfullyimplementing similar
project
• Evaluation of
technical capabilitiesof solution to meet the
business goals
• Flexibility and
adaptability to newdevelopments
• Ensuring smooth,
timely and cost effectiveimplementation of new
system
• Ensuring adaptation in
the work culture andpost-implementation
smooth operations
• Commitment of vendor
to provide long termsupport
• Technical advancementsand their compatibility
with the new system
Project Stages
Evaluation risk
& management
commitment
Selection of
vendor, service
providers
Solution risk Implementation
risk
Long term
technical
support risk
Source: Asian Banker Research
Risks and potential losses in replacing a core banking system are veryhigh, making it imperative that banks tread with caution at each step.
We have identified
five broad stages in the replacement process andinherent risk characteristics of each.
Lack of management commitment is one of the primary causes forproject failure. We believe that a core banking replacement project needsbusiness and management support in totality and the project should notbe perceived as an IT project. Management commitment should not belimited to simply business and managerial involvement at all stages ofthe project but extend to strong leadership support that sees the projectthrough.
The evaluation of business needs and objectives must be comprehensive,
as inadequate assessment of technical and functional requirements willlead to improper selection and possibly expectation/deliverable mismatchat a later stage. It is critical for the bank to understand the type and depthof functionality provided by the core banking solution in the context of itsown requirements and replacement objectives.
Availability of multiple solutions with varying technology and comparablefunctionalities has made this task more dif ficult. We believe that while animproper selection of solution could lead to short-term benefits, it mayact as a constraint in the longer term.
In our opinion, the foremost issue in selecting a core banking system is
the solution. If the solution is right, then a bank can always opt to bring in
•
•
•
•
•
Inherent risks in replacement
project
Banks need to tread carefully
as there are hurdles at each
step of the change process
Project needs business support
in totality
Evaluation at each stage has to
be comprehensive
Improper selection of vendor
and system can lead to project
failure
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a third-party service provider should things not go as planned. But that isthe worst-case scenario. As a general guideline, a vendor is not just an ITsupplier for the bank; instead it should be viewed as a partner that wouldprovide not only the solution and integration services but also long-termrelationship and technical support to the organisation. We believe thatbanks should not just evaluate the financial viability and track record ofthese vendors, but also ensure adequate fit with the project and thatthey are able to trust the service provider. This is especially true for theselection of the systems integrator, which can make or break a project
by its decisions on the resources assigned to the project.
Transition from an old system to a new technology is a risky propositionin any organisation. It is more so in the case of banks due to the highrisk of potential losses and errors in a scenario where they cannot allowa margin of error.
Risks are present at all corners, whether it is system customisation,data migration, consolidation of multiple systems, integration of multipleprocesses or user adaptation to new processes. Another risk is thepossible lack of long-term support from vendors, which could translateinto faster obsolescence of the system and inability to meet expectations
amid the constantly changing dynamics of the banking sector.
Analysing various risk elements in the planning stage of the project wouldhelp ensure the adequacy of selection criteria and lower the likelihood ofexpectation/deliverable mismatch at a later stage.
•
•
•
Banks cannot afford any margin
of error in the implementation
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4.8 Financial ImplicationsInvestments and Costs Implications
Cost Analysis
Recurring Cost
One Time Cost
Planned Unplanned
Core Banking
Hardware
System
Integration
Unexpected
Cost
Loss of
BusinessCustomers
Core Banking software acquisition and
maintenance cost
Hardware acquisition and maintenance
cost
System integration and consulting cost
Planned CostsUnexpected delays
Incremental changes during implementa-
tion
Scope of project becoming too big
Resistance to change
Unplanned Costs
Source: Immacon Research
Ownership of the core banking system is very costly and requiresstrong commitment and business justification in most cases. It is for thisreason that most banks take considerable time in coming to a decision
to replace or even upgrade their system. The cost components of thetotal capital expenditure are software and service cost which constitutes30%, system integration cost of 20-25% and hardware and infrastructurecost of 45-50%.
The software and service cost is highly dependent on the scale andcomplexity of the project. For example, it could be $100 million or morein large global banks but it has generally been much lower for smaller Asia Pacific banks. In Asia, the cost of software and services has beenin the range of $5 million to $10 million for small banks and $20 millionto $25 million for mid-sized banks, while for large banks it can go muchhigher. The investment is substantial and it is normally amortised over a
period of 5-7 years.
•
•
Replacing core banking
system has high risks and
huge costs and thus requires
strong business and financial
justification
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Recent big deals have shown significant variation in the expenditureincurred for software and services. For example, it was reported to be$20 million-$25 million in the deal for HSBC, around $35 million for StateBank of India, $33 million for Central Bank of India and $4 million forUnion Bank of Philippines.
For many vendors, the pricing may be different when they ventureinto new or more competitive markets. Involvement of a local partnergenerally helps to lower the costs of the project. Our research showsthat many large banks prefer to hire consultants to guide this complex
process and they often have a team of vendors and system integrators. All these add to the total cost of the project.
Maintenance cost is generally considered part of operating expenses.Some banks that undertake in-house implementation may needadditional IT manpower, on top of what is required for the basic corebanking system. But most banks take this into consideration and justifyit when planning for core banking replacement.
However these may not be the only costs involved. In many cases, thereare also hidden costs in the process. These unplanned costs may comefrom service disruptions, system downtimes or other system problemsduring the course of implementation or from unexpected delays in projectimplementation.
Cost overrun could also be caused by incremental changes, which oftenincrease the scope of the project and are sometimes due to the allureof technical advancement. While such changes may be a necessity insome cases and improve the ef ficacy of the project in others, the bankshave to evaluate these against the corresponding cost and scheduleoverruns. It is common for the bank to realise that there is a mismatchbetween deliverables and expectations when it has reached theimplementation and deployment stage. Usually resulting from improper
project realisation, delta analysis or communication, this has been oneof the primary causes for incremental changes in the project leading tounexpected overruns.
While the banks strive to keep these costs in check, there is anothertype of cost that gives critical business justification for such a steepinvestment. For most banks, the replacement decision is taken only whenthe “opportunity cost” of not changing a system (such as loss of marketshare, reduced competitiveness and lower growth) becomes too highand, in many cases, when their survival is at stake. Some other banksfind it easier to justify the replacement citing regulatory requirementssuch as those under BASEL II. Nonetheless, the substantial cost savings
(post replacement) – both tangible and intangible – coupled with revenue
•
•
•
•
•
•
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growth in the long term are definite motivations. We discuss these furtherin the following section.
Financial Justifi cation of New System
Increasedefficiency,
competitivenessand time saving
Improvedmargins and
return oninvestment
Shorter breakeven period,
lowermanpower cost
and higher ROI.
Improvedcompetitiveness
and growth.Customer
relationship
improved
Improvedmarket
presence,capture of new
market,
increased fee,revenue
Improvedrevenue
generation,business
growth
Direct benefits
Indirect benefits
Legend
Project Stages
Integrated,
flexible system
Lower
opportunity
costs
Lower
operational,
maintenance
cost
Customer
centric, STP
Innovative
products,
bundling
New
initiatives,
services
Expected deliverables of the new system
Direct and indirect financial impact for the bank
Source: Asian Banker Research
While there is clear business justification in the form of intangiblebenefits such as market growth, retaining of competitiveness and long-term success, many bankers mull over cost effectiveness and return oninvestment (ROI) in order to find financial justification for the project.
Though varying with individual projects, cost savings primarily come fromlower maintenance costs, lower operating costs and time savings. Manylegacy systems demand a large pool of IT-trained manpower, whichis becoming increasingly scarce and expensive. Reduced manpowerrequirements after replacement would therefore lower the maintenancecosts. In addition, systems that provide front-end and back-of ficeintegration improve ef ficiency in data collection, enhance operational
processes and allow the keeping of consolidated customer information,thereby helping the banks to meet customer requirements more quickly,which in turn lowers the operating costs.
As the banks go for STP, the rollout time for products declines. This,coupled with faster response times, provides considerable time savingsfor the banks. For many banks, these cost savings have led to a shorterpayback period and an improved ROI. Industrial Bank of Korea claimsthat with its legacy system, it used to take almost a month to roll outa product. But since implementing a new core banking solution (byTemenos), the rollout time has reduced to 2-3 days and the time forbatch end-of-day settlement has reduced by 30%.
•
•
•
Financial justification through
cost savings and revenue
growth
While investment is substantial,
benefits from cost savings, ROIand business growth could be
more
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Vendors often claim that replacement brings about a sharp increase inproductivity. However, attributing the improvement to only the new systemwould not be appropriate as in many cases replacement is accompaniedby process restructuring.
The most critical impact on a bank’s financials is in its revenue growth. A flexible system can facilitate the development of innovative productsto cater to ever changing market demand. Designing and creating newproducts and customising are easier with the right system, which leadsto more product innovation and shorter rollout times.
The bank would achieve faster growth (and in many cases greater marketshare) with its ability to make quick decisions and its agility in rolling outnew products. Banks like ICICI and HDFC in India have managed tocapture a large share of the Indian market (which was earlier monopolisedby state-owned banks) through improved service quality and innovativeproducts due to their advanced core banking systems.
Customer-centric systems (compared to account-centric systems ofthe past) provide a single view of the customer to multiple functionalsegments of the bank. This facilitates customising of products to customer
segment, cross selling and bundling of products and services, leading toimproved fee collection and revenue growth. Additionally, the bank canenhance customer satisfaction and improve business through featureslike virtual 24/7 banking.
The cost savings and revenue growth will vary between banks dependingon the unique features of individual projects. Some big banks claim thatthey have benefited through a distinct improvement in ef ficiencies andthe retention of a substantial number of customers that they would havecertainly lost otherwise. Most banks also agree that there has beendrastic reduction in end-of-day processing time and product developmenttime (e.g. some banks can set parameters of products within a couple of
days). Most banks have extended their hours of operation to nights andweekends as well. These tangible and intangible benefits often providesubstantial financial justification for the banks to take the plunge.
•
•
•
•
•
Intangible boost to growth
highly possible if bank has the
right system
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5Core BankingReplacement BuildingBlocks
We have identified the critical building blocks of the core banking
replacement project. These comprise the technical issuesthat arise as the bank shifts from one system to another. The
issues covered herein are coexistence, interfaces, data cleaning
and conversion, and product and process rationalisation. The
objective is to highlight the issues and success factors in the
transition process. Our target audience for this section are the
key technical decision-makers in the bank.
Core Banking Replacement Bui lding Blocks
5.1 Application architecture and core banking5.1.1 Key issues
5.1.2 Deployment strategy
5.2 Service oriented architecture
5.3 Interface considerations
5.4 Coexistence
5.4.1 Branches
5.4.2 Call centres
5.4.3 ATM transactions
5.4.4 Other online interfaces
5.4.5 Batch interfaces – inward clearing
5.4.6 Batch interfaces – outward clearing
5.4.7 Other transaction implications
5.5 Data conversion and data cleansing5.6 Product rationalisation
5.7 Process rationalisation
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5.1 Application Architecture andCore Banking
Our research into core banking architecture and deployment practicesreveals that the process of replacement consists of several critical building
blocks which need to be taken into consideration during planning:
Core Banking Building Blocks
Deployment
Strategy
InterfacesProcess
Rationalisation
CoexistenceProduct
Rationalisation
Service Oriented
Core Banking
Architecture
Data
Conversion
Change
Management
Project
Organisation &
Programme
Management
Building Blocks
Source: Immacon Research
5.1.1 Key issues
In our analysis, we found a number of key questions which always ariseconcerning these building blocks. For example:
Big bang or phased deployment strategy – Is coexistence of the oldand new worlds required? If yes, what type/scope of coexistence is
needed? How long can we tolerate coexistence?
Service Oriented Architecture (SOA) – What is the impact of the new
core banking system on the bank’s overall systems architecture? Whatchanges are required? What impact will it have?
Interface considerations – How many interfaces will we need to build?
Who is going to build it? How can we minimise the risk of slippage in the
interfaces?
•
•
•
•
•
Critical building blocks of core
banking transformation
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Core Banking Replacement Bui lding Blocks
Coexistence – How will the old and new worlds coexist during the
deployment period?
Data cleansing and data conversion – What is our approach to data
conversion? What inter-dependencies exist? How do we address data
cleansing?
Process rationalisation – Which processes will be impacted by the
core banking replacement? Shall we change the processes or shall we
change the core banking system? How much legacy do we want to take
over to the new “post core banking replacement world”? How can webest manage the rationalisation process?
Product rationalisation – Which products can be converted without
modifying the core banking system? Which products and services will be
impacted by the core banking replacement? Shall we change our products
or shall we modify the core banking system? How many legacy products
do we want to take over to the new “post core banking replacement
world”? Are there opportunities for new products and services as part of
the core banking replacement? How can we best manage the product
rationalisation process?
Project organisation and programme management – How do we
organise the project? Do we need senior management involvement?
If yes, how much involvement? Do we need external consultants or a
systems integrator to help, or can we do it in-house? If we need external
help, how can we best manage the external resources?
Change management – What is change management? Do we really
need it? If yes, how much change management do we need? Do we
focus purely on internal change management or do we also need external
change management?
Banks need to answer these and other questions for a successful corebanking replacement project. This chapter will examine some of these
core banking building blocks in more detail and explain their purpose in
the overall programme of core banking enabled transformation.
5.1.2 Deployment strategy
A critical decision for any core banking replacement is the choice
of deployment strategy. There are primarily two options: big bang
implementation or a phased rollout by cluster. For each approach, there
are a number of variations. But for the purpose of this document, we will
focus on the two broad options:
•
•
•
•
•
•
•
•Identify the deployment
approach most suitable for the
bank’s needs
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Big Bang is a deployment strategy which assumes that all systems will
be deployed at the same time in one big bang. As a result, banks do not
need to worry about coexistence or the more complex rollout logistics
of a phased approach. The disadvantage of the big bang is that there
is little or no margin for error. If a large bank is considering big bang
deployment, it should conduct massive training and repeated conversion
rehearsals over some period of time. The transition planning also has to
ensure that all conversion logistics are in place, i.e. hardware, systems
software, network, etc. Analysing best practices, we have found that
conversion rehearsals should always include a month end. We see thebig bang option as the most risky approach, only worth considering for
small banks.
Phased Approach is the deployment of the new core banking solution by
branch or regional cluster. It is recommended that the phased deployment
is conducted as a “big bang” for each deployment cluster. This means
that, as in the big bang approach, the entire solution is deployed in one
go – but only for a manageable cluster and not for the entire enterprise.
The advantage of this approach is that banks receive the benefits of
the big bang for all deployment clusters while keeping risks within a
manageable level. For instance, if deployment problems occur, they can
be confined to the cluster and will not affect the entire enterprise. Onthe down side, a phased rollout will take longer and will require massive
logistical planning for each deployment cluster. Nevertheless, we believe
that the benefits of this approach, especially risk mitigation, more than
compensates for its higher cost and longer deployment period.
•
•Phased approach has
manageable risk
Big bang is quick but has no
margin for error
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5.2 Service Oriented Architecture We believe it is essential that the bank has the right architecture to
suit its core banking needs. The architecture is important because it
will set the foundation for the future. Choosing an ageing and inflexible
architecture will lock the bank in the past before it even starts with the
deployment of its core banking solution. Service Oriented Architecture
(SOA) is a relatively new concept that has been gaining popularity lately.
While vendors often talk about it, many banks consider it just as a new
buzzword. The fact remains that this is a new technology which stillneeds to mature and develop the capability to successfully manage high
transaction volumes. Nonetheless, it can provide the necessary flexibility
and is being actively considered by some banks. We have described the
essential elements of SOA below.
SOA is essentially a business-driven framework for the deployment
of reusable business components embedded in computer code. This
definition highlights some of the essential elements of this architecture.
Herein the services are “loosely coupled”, i.e. not tightly integrated as that
would limit its flexibility. Specifically, each “service” has a corresponding
“contract” which defines what the service does and how it can be used.
We understand that there should ideally be no restriction on how a service
operates internally in order to deliver on its contracted capabilities. This
can enable each service to be altered internally without necessitating
changes to the client applications (which can include other services) so
long as the changes do not alter the contracted definition of the service
and how to use it. If this is achieved, the advantage is clear – one can
modify the internal operations or even replace a given service without
having to modify every programme that uses the same service so long
as the contract is not changed.
Those who advocate SOA believe that it is not about the internal workingsof the application but about how the application exposes its “services”
to the outside world. Thus, although the selected core banking system
may not have been constructed with SOA environments in mind (many
were not), it can fit into an SOA environment by exposing its services
through well-defined interface contracts (e.g. for withdrawals, transfers,
clearing, and the like). This would enable the bank to loosely couple their
existing applications with the new core banking system and avoid the
disadvantages of tight coupling.
According to the definition of Dirk Krafzig, Karl Banke and Dirk Slama
in their book Enterprise SOA (Prentice Hall ISBN 0-13-146575-9), an
•
•
•
•
•
Build the system around SOA
which would provide the bank
with business flexibility
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Enterprise Service Oriented Architecture can be defined as follows:
Defi nition of Service Oriented Architecture (SOA)
Business Logic Data
Application
Front-end
Business
Service
Service
Repository
Service
Bus
Contract Implementation Interface
Service
Oriented Arc hit ectu re
(SOA)
A Service Oriented Architecture (SOA) is a software architecture that
is based on the key concepts of application front-end, business
service, service repository, and service bus. A service consists of a
contract, one or more interfaces and an implementation.
Services and application
model are the major
attractions of SOA
In addition there is a
service repository and a
service bus
The application front-endis the owner of the
business processes
A service consists of...
a) a service contract that specifies the functionality, usage, and constraints for a client of the service
b) an implementation that provides business logic and datac) a service interface that physically exposes the functionality
A client can be either an application front-end or another service
1 2 3 4
a b c
b2b1
1
Services provide business
functionality that theapplication front-end and
other services can use
2
The service repository
stores the servicecontracts of the individual
services of an SOA
3
The service bus intercon-nects the application
front-end and the
services
4
Source Synthesised from Enterprise SOA by Krafzig, Banke and Slama
A core banking architecture consists of deposit and loan product
processing engines, as well as a product factory for rapid deploymentof new products and services. The customer information repository sits
outside the core banking architecture and is loosely coupled to it throughan enterprise service bus. This is necessary as the customer information
repository must be able to support multiple core banking systems, as isrequired in many banks around the world.
A more detailed view is included in chapter 3 (core banking definition)
•
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Illustrative Core Banking Architecture
Multi-Channel Bank System
ExternalInterfaces
GeneralLedger
CreditCards
ClearingHouse
BahtNet
Branch
Call Centre
ATM
Internet
etc.
etc.
etc.
Core Banking System
Customer Information
Collateral Information
Common Services
Product Definition & Management
Deposits Loans
C h ann
el I n t e gr a t i on
A p pl i c a t
i onI n t e gr a t i on
R e p or t i n g / S
t a t em en t I n t er f a c e
Source: Immacon Research
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5.3 Interface Considerations Our research shows that interfaces are a key concern for any corebanking replacement project. Every major application in the bank is
interconnected, or interfaced with the core banking system, as illustratedin the chart below. According to some experts, an enterprise service
bus (ESB) and an SOA together can help to reduce the number andcomplexity of interfaces, enabling the bank to focus on its core business
rather than the maintenance of an IT infrastructure.
Old Core Banking System
Online Online Online Batch Online/
Batch
Batch
Batch Online Online
Online/
Batch OnlineBatch
Online
Batch
Batch
Batch
Online
Online
Batch
Online
Batch
Batch
BranchApplication
Core BankingSystem
Trade Finance
HumanResources
FinancialPlanning
Agent Service
Audit andControl
AuthorisedSignature
DataWarehouse
CashManagementCall Centre Cheque CIS
E-Channel
EAI
Donation
Custodian
Credit Card
BONDSWIFTPaymentLoan
Old
Core Banking
System
Source: Immacon Research
Transition from the old core banking system to the new core banking
system can be conducted in three steps:
•
•
SOA and ESB together can
reduce the complexity of
interfaces
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Transtition Phase
Step 1:
Implement switching
layer
Step 3:
All accounts
converted to new
Core Banking System
Step 2:
Phased migration to
new Core Banking
System and
coexisting withLegacy
Source: Immacon Research
The end result is a smooth transition from old to new core banking
system, as illustrated below:
New Core Banking System
Online Online Online Batch Online/
Batch
Batch
Batch Online Online
Online/
Batch OnlineBatch
Online
Batch
Batch
Batch
Online
Online
Batch
Online
Batch
Batch
BranchApplication
Core BankingSystem
Trade Finance
HumanResources
FinancialPlanning
Agent Service
Audit andControl
AuthorisedSignature
DataWarehouse
CashManagementCall Centre Cheque CIS
E-Channel
EAI
Donation
Custodian
Credit Card
BONDSWIFTPaymentLoan
S W I T C H I N G M E C H
A N I S M
New
Core Banking
System
Source: Immacon Research
•
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5.4 Coexistence Our research indicates that as the bank replaces the system using
phased implementation, it often faces the critical issue of coexistence.
Coexistence is the strategy and process taken to operate two core
banking systems concurrently for a limited period of time. Coexistence
describes in detail which methods, such as switches, merges and manual
processes, are used to process transactions between the old and new
worlds.
A critical question in core banking replacement is how the bank should
deal with coexistence issues, assuming that it chooses this deployment
option. Coexistence planning is a very complex activity. But contrary to
the common myths, it is clearly doable and it works.
Coexistence Environment Overview
Old World / Legacy
Core Banking System
Coexistence
Switches /
Merge
New World / Next
Core Banking System
Coexistence Infrastructure
Old
Core Banking
System
New
Core Banking
System
Other
Online
InterfacesATM
Call
Centre
Systems
Clearing
House
Other
Batch
InterfacesUnconverted Branches Converted Branches
Source:Immacon Research
We have come across different methods of managing coexistence and
interfaces. Described below are types of interfaces that we believe are
the better ways of dealing with coexistence.
•
•
•
Coexistence poses
considerable challenges
demanding complex and
strategic planning
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Coexistence Implications
Coexistence Implications
how does the bank operatewhile accounts areprogressively converted to thenew core banking system?
how will inter-branchtransactions be handledduring coexistence?
how will the call centreservice requests duringcoexistence?
how will ATM transactionsbe processed duringcoexistence?
how will other onlineinterfaces be processedduring coexistence?
how will incoming batch interfaces be processedduring coexistence?
how will outgoing batchinterfaces be processedduring coexistence?
how will sweeping andother features beprocessed duringcoexistence?
Branches Call Centres
Batch Interfaces
(Outward Clearing)Other Implications
ATM Transact ion sOther Online
Interfaces Batch Interfaces(Inward Clearing)
What is Coexistence
Source: Immacon Research
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5.4.1 Branches
In most banks, the branches account for the bulk of customer-facing
transactions. A key question to be answered here is how the bank wants
to treat the different types of possible intra-branch transactions. As most
affect the customer and the bank’s relationship with him, we believe
that it is important to have business involved in all of these discussions
and let business make the final decision on how to proceed. After all,
business will know its customer better than IT does. There are a number
of options:Branches During Coexistence
Old branches can access new accounts Yes No No
New branches can access old accounts Yes Yes No
ATMs can access all accounts Yes Yes Yes
Development effort / risk High Low None
FeatureOption 1
2-way SupportOption 2
1-way SupportOption 3
No Support
Coexistence Options
Old Branch New Branch
Customer has account in anew branch and wants totransact at an old branch
Customer has account in anold branch and wants totransact at a new branch
Source: Immacon Research
At first glance, the two-way option may look like the best choice. However
we understand that it comes with a high cost for building the coexistence
interfaces. After analysing transaction volumes, banks may find it
worthwhile to consider option 3, “No Support”, as a feasible alternative.
In our review, we learnt that business usually understands and supports
this approach for standard branch services (e.g. deposits, withdrawals
and transfers). The business rationale is that the potential inconvenience
is only for a limited time and can be managed through good customer
communication, especially where there is low to moderate transaction
volume. Our research indicates that if the bank is replacing its front-end
system and core banking system at the same time, option 3 is preferable
because it reduces the need for temporary integration between the old
front end and the new core banking system and between the new front
end and the old core banking system.
•
•
For intra-branch transactions,
business should make the
decision on coexistence
approach
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5.4.2 Call centres
We believe that the second-most important customer contact point is
the call centre. During coexistence, the call centre transactions can be
handled through an online transaction switch without posing any problem
for the operation.
Call Centre Transactions During Coexistence
Old
Core Banking
System
New
Core Banking
System
New Core Banking System
Call CentreSystem
Old Core Banking System
Online Transaction
Switch
Source: Immacon Research
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5.4.3 ATM transactions
Our analysis shows that managing coexistence of ATM transactions is
usually not of any major concern. Due to the nature of ATM transactions,
the infrastructure is already in place to deal with multiple back-end
systems.
ATM Transactions During Coexistence
Old
Core Banking
System
New
Core Banking
System
New Core Banking System
Old Core Banking System
Tandem ATM SwitchATM
Source: Immacon Research
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5.4.4 Other online interfaces
These are treated with the same strategy, i.e. the use of online
switches.
Online Transactions During Coexistence
Old
Core Banking
System
New
Core Banking
System
New Core Banking System
Old Core Banking System
ExternalSystem
Online TransactionSwitch
Source: Immacon Research
•
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5.4.6 Batch interfaces – outward clearing
Similarly we have found that outward clearing transactions can be
addressed through a batch combiner. The batch combiner, as the name
implies, will combine the outgoing clearing transactions into one or
more batches, in accordance with the clearing house regulations. Again,
technically, this approach does not pose any challenge and has been
successfully used by leading banks around the world.
Outward Clearing Transactions During Coexistence
New Core Banking System
Old Core Banking System
Old
Core Banking
System
New
Core Banking
System
ExternalSystem
BatchCombiner
During rollout, thenew system will alsogenerate this datafor convertedaccounts …
A ‘Combiner’ will
therefore be needed
B a t c h
Source: Immacon Research
•
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5.4.7 Other transaction implications
Other types of transactions need to be analysed on a case-by-case
basis. Typically these transactions centre on inter-branch sweeping and
standing orders, as illustrated in the chart below:
Other Coexistence Implications
Coexistence Implications
Inter-Branch
Sweeping
Amend the systems topass the transactions out
Create an external systemfor inter-branch sweeps
Manual processes
Standing Orders
Amend the systems topass the transactions out
Create an external systemfor inter-branch standing orders
Manual processes
Others
Each situation will have tobe judged on
Criticality Volume
Complexity
A decision is then made onthe best solution available
Source: Immacon Research
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5.5 Data Cleansing and DataConversion
Our research shows that data cleansing and data conversion are of the
utmost concern for most banks around the world. We believe that data
cleansing should not be conducted as part of a core banking project.
In our opinion, data cleansing is an entirely separate project with its
own organisation structure and milestones. It should be an ongoing
operation (rather than a one-off project) at the bank and great careshould be taken to avoid creating dependencies between data cleansing
and the core banking project. Placing data cleansing objectives with
the data conversion team is tantamount to asking for unclean data to be
converted.
Data should be cleaned either before or after it is converted, but not
during the conversion exercise, and not by the data conversion team.
This is important as cleansing of customer data cannot be resolved with
technology alone, but requires the hands-on involvement of the bank’s
customer-facing personnel. Note, however, that other types of data
transformation are required during the core banking data conversionto accommodate differences in data format between the old and new
systems or to auto-set default values for new fields in the new system.
But these should not be confused with data cleansing, which changes
the meaning of existing data rather than its format or structure.
Data conversion, on the other hand, is an important part of the core
banking replacement project. It can be executed in three stages, as
illustrated in the chart below:
•
•
•
Data cleansing should be a
separate project distinct from
the core banking project
Data conversion can be
executed in three stages
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Data Cleansing and Data Conversion
CustomersAccountsStanding Instructions Transaction HistoryEtc…
Data
CustomersAccountsStanding Instructions Transaction HistoryEtc…
Data
... what it takes :
Step 1: Data Mapping
Step 2: Data Conversion
Extracts
Step 3: Data ConversionLoads
Data Cleansing
Data ConversionOld
Core Banking
System
New
Core Banking
System
Source:Immacon SOBIT Methodology
Data mapping – Our research shows that banks start the data conversion
process with data mapping. This essentially entails mapping the old-world data elements to the new-world data elements and can be used to
identify areas for product and process rationalisation. There are a number
of considerations for data mapping, as illustrated in the chart below:
Data Mapping
Step 1 : Data Mapping
Current Account
Is there a corresponding product for each ofour existing products?
Can we rationalise our products to fit thesupported products in the new CBS?
Current Account
Product
Current Account
Account No.
Current AccountAcc Branch Code
Acc Product Code
Acc Sequence No.
Acc Check Digit
Does the new system’s account numberstructure match our existing structure?
Should our account number structurecontinue to have meaning?
When will we run out of account numbers?What should be the length of the accountnumber? What are the implications for thenew system, cheques, passbooks, ATMtransaction records, etc. ?
Account No.Attributes
Data Mapping Considerations
“New World”Core Banking System
“Old World”Core Banking System
Domicile Branch Code
Account Open Date
Interest Rate Method
Limit
Is there a one-to-one mapping of fields forthis product (i.e. Current Accounts)?
Is there a one-to-one mapping of field values(e.g. are our interest rate methods supportedby corresponding methods in the new CBS)?
How do we handle custom fields (e.g.Special Field1)? Should wecustomise the new CBS or rationalise therequirement?
Is the source data “clean”and acceptable?
Domicile Branch Code
Account Open Date
Interest Rate Method
Limit
Special Field1
Source:Immacon SOBIT Methodology
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Data conversion extracts – During this second stage of the process,
customer and account information is extracted from the existing system
and put into the conversion staging area in preparation for loading into
the new world system.
Data Conversion
"Old" World
Conversion Staging Area
DATA
Customers
Accounts
Standing Instructions
Transaction History
Etc…
Extracted data ready for loading
Conversion data file layout as
required by new core banking
system
Conversion
Data
Conversion
Reports
Data
E x t r a c t M o d u l e s
Step 2 : DataConversion Extracts
Old
Core Banking
System
Source:Immacon SOBIT Methodology
Data conversion loads – This is the final stage where customer and
account information is loaded into the new core banking system and
reconciliation reports are automatically generated.
•
•
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Data Conversion Loads
"Old" World
Conversion Staging Area
DATA
Customers
Accounts
Standing Instructions
Transaction History
Etc…
Extracted data ready for loading
Conversion data file layout asrequired by new core banking
system
Conversion
Data
Conversion
Reports
Data
E x t r a c t M o d u l e s
Step 3 : DataConversion Loads
"New" World
DATA
Customers
Accounts
Standing Instructions
Transaction History
Etc…
Conversion
reconciliation
and verification.
Report Generator
Reports
L o a d M o d u l e s
Old
Core Banking
System
New
Core Banking
System
Source:Immacon SOBIT Methodology
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5.6 Product Rationalisation We have discovered that product rationalisation is also an important
element of successful replacement projects. Product rationalisation is
essentially the process of assessing the value of the bank’s current
product and service offerings, i.e. whether a product or service is still
competitive and profitable or should be deemed “sunset”. This is the
time to ask not only where the bank is with its current offerings but also
where it wants to be in the future. Banks often also check if an existing
product or service can be migrated to the new platform in a cost effectivemanner, e.g. without too much customisation. Also to be considered is
how the bank can make full use of the new core banking solution and
launch competitive new/enhanced products and services. Ultimately, the
bank needs to define the future market offerings in terms of:
a. products/services to be discontinued,
b. products/services to be redesigned and renewed, and
c. new products/services to be introduced with the launch of the new
core banking system.
Hence, product rationalisation has a number of benefits for the core
banking replacement programme. It enables the bank to take full
advantage of the capabilities of the new core banking solution. It
simplifies the sales process through consolidation of “like offerings” into
core banking “configurable” products.
It also provides an opportunity to discontinue products/services that
are not, or not adequately, contributing to the bottom line. In addition,
it mitigates the risk of project delay and failure as the bank avoids
unnecessary customisation to support redundant old-world products.
•
•
•
Data conversion can be
executed in three stages
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5.7 Process RationalisationCore banking replacements will impact most of the front- and back-end
users. Hence, process rationalisation provides the bank with a chance
to overhaul its fragmented and perhaps outdated business processes as
an explicit outcome of the core banking enabled transformation. It allows
discontinuation of legacy processes and elimination of paper-based or
semi-automated processes. It also provides an opportunity for process
re-engineering to utilise the new core banking solution to its fullest.
•Process rationalisation can
overhaul outdated processes
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6Critical Success Factorsand Best Practices
Organisation of the project and management of the change are
critical issues for projects of such a scale. We have identified thekey factors and best practices for banks to accomplish success
in selection and implementation. We have also detailed the
essential ingredients for service providers to achieve successful
implementation. This section is targeted at all decision makers,
within banks as well as vendors.
Critical Success Factors and Best Practices
6.1 Project organisation and programme management6.1.1 Stage 1 project organisation
6.1.2 Stage 2 project organisation
6.1.3 Stage 3 project organisation
6.2 Critical success factors and best practices in system selection
6.3 Critical success factors and best practices in vendor selection
6.4 Best practices for vendors (for successful implementation)
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6.1 Project Organization andProgramme Management
We believe that a project of the magnitude and scale of a core bankingreplacement requires strong project organisation and programme
management. In addition, the project organisation should be adjusteddepending on the phase of the project.
Business Transformation Team Structure
Others
Teller
Core Banking
Common Activities Deployment
Project Organisation
Steering Committee
Programme Director
QA PMO Support Team
Core Banking Enabled
Transformation Technology
Core Banking Enabled
Business
Process
Architecture &
Integration
Data
MigrationTesting
Organisation
& Change
Functional Technical
Benefit
Realisation
Business Transformation
Team Process
Coordination & Decision
New WorldCluster Pilot
Source: Immacon SOBIT Research
Our research has led us to a few best practices in programme organisation
which we discuss below. The overall responsibility for the project should
lie with the project steering committee. This committee should be chairedby the CEO and it is important that he demonstrates commitment to theproject. Other members of the steering committee should include the
bank’s full-time programme director, heads of all the business units, theCIO, and key risk-management and finance personnel.
We believe that the bank’s full-time programme director should have
complete authority over the project. The programme director should beempowered to make decisions after consultation with business and IT.
He needs the authority to make the final decision if consensus cannotbe reached with a business division or with IT. An overriding decision
should be immediately reported to the steering committee, which can
veto the decision if necessary.
•
•
•
Programme organisation should
delineate the responsibilities
and accountabilities of project
decisions
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6.1.2 Stage 2 project organisation
The second stage of the project is the move from delta analysis and
resolution to the build-and-test stage. The focus at this point is on the
rapid technical implementation of the solution.
Stage 2 Project Organisation, Bui ld & Test
Core Banking
System Project
Manager
System
Implementation
Team
Int erf ac es Team Test ing TeamTraining &
Procedures
Team
Customer
ApplicationTeam
Deposits
Application
Team
Loans Application
Team
Online
Interfaces
Batch
Interfaces
Legacy Systems
Teams
3rd Party
Interface
Systems Teams
Pilot Site
Selection Prep.
Go /No Go
Assessment (ext.
Accountants)
Business
Testing Team
Integration
Testing Team
CoexistenceDevelopment
Team
Operations
Testing Team
Conversions
Data ExtractsTeams
Train-the-
TrainersTraining Team
User
Procedures
Team
Online
Application
Team
Accounting &
Other Apps
Team
Data
Conversion
Load Team
Project OfficeTechnical Support
Stage 2
Stage 2
Build & Test
Significant Third
Party ResourceInvolvement
Source: Immacon SOBIT Research
•
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6.1.3 Stage 3 project organisation
The third stage of the project sees a move from the technical build-
and-test stage to the pilot implementation stage. The focus here is the
deployment of a live pilot, to test and fine-tune the new core banking
solution and its processes and procedures.
Stage 3 Project Organisation, Pilot
Significant ThirdParty Resource
Involvement
Core Banking
System ProjectManager
Pilot Team
Core Banking System
Pilot User Support
Team
Core Banking System
Applications Fix
Teams
Interfaces Support
Team
Data Conversion &
Coexistence Support
Team
Pilot User Training
Team
Legacy System Fix
Team
3rd Party Interface
System Fix Team
Conversion Data
Extracts Support
Teams
Project OfficeTechnical Support
Stage 3
Stage 3
Pilot
Source: Immacon SOBIT Research
•
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commitment to successful implementation. The selection process should
involve key representatives from functional divisions as they would be the
ultimate users. But users see only the front end, while IT people may be
more aware of the technical requirements in terms of processing power.
Thus it is necessary to involve both the teams and ensure coordination
while avoiding/resolving conflicts.
A detailed matrix of selection criteria should be developed. Each solution
and vendor needs to be evaluated on this matrix, and the system that can
provide the highest value to the organisation should be selected. Having
a consultant (who has experience with similar projects and awareness
of unique local requirements) to guide the bank would further strengthen
the selection process.
We recommend that banks leave the old world behind and move to the new
system in entirety. While this poses significant transformation challenges,
it would ensure optimum returns as there would be no “legacy baggage”.
But the bank must ensure that the system functionality, platform and
technology are right for its needs and it would not be wise to just choose
the “best” in the market. The architectural components of the system
and its raw processing ability are critical. The technology should easily
integrate with existing systems within the bank, facilitate differentiation,assist in quick decision-making, improve competitiveness through faster
product development and, at the same time, improve returns through
lower operational and maintenance costs.
Further, the architecture of the selected system should facilitate
growth plans. There may be cases where the functional and technical
capabilities of a system make it scalable but not flexible, or vice versa. In
such a scenario, banks may just be shifting their systems from a smaller
box to a bigger box where growth may be constrained again within a
few years. This should be avoided at all costs. The architecture should
be component-based as this would allow for the possibility of making
future additions to the system. We highly recommend an SOA-based
system that can provide flexibility for future changes. Banks can select a
packaged system that has the ready processing capacity and customise
the front end to suit the user needs.
Finally, it is important that bankers do not lose sight of business objectives
and get wrapped up in architectural discussions and process redesign
issues that are too broad or diffused to add value to the business. They
should aim for quick decision-making and system selection in order to
prevent opportunity costs from rising further.
•
•
•
•
Functional capabilities and
architecture should facilitate
growth plans
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6.3 Critical Success Factors andBest Practices in VendorSelection
Success Factors in Vendor Selection
Track record and
technical ability of
the product to
meet the
functional
requirement
Ability to tide
over
downtrends and
sustain
technical
advancements
Ability to meet
the unique local
requirements
and yet provide
the requisite
quality
standards
Financial ability
and
commitment
towards long
term technical
advancement
and services
Reputation and
long term
commitment to
provide ongoing
support and
future
integrations
Project Stages
Identify
vendors with
track record
and reputation
Evaluate
financial
strength and
viability
Evaluate
experience
with similar
projects
Evaluate
commitment
to business &
technical
enhancement
Evaluate post-
implementation
support and
services
Evaluating service providers
Source: Asian Banker Research
System selection and vendor selection go hand in hand. Vendors and
service providers can no longer be viewed as just IT suppliers. Instead,they are partners in the long-term success of a bank. The selection, in
many cases, is based primarily on cost savings, which ironically mayprove to be a costly mistake in future. The basis of decisions should be
the vendor’s capabilities and not pricing.
It is imperative that banks ensure the vendor provides the right mix ofproduct and services required to meet the objectives and ambitions of
the business and the unique requirements of the project. The relationshipbetween system provider and system integrator should also be evaluated
and their track record in managing projects as a team needs to beanalysed.
Equally important is that the bank has to evaluate its own comfort level
with regard to the vendor’s reliability and suitability for the particularproject. If the bank has an existing system from the vendor, there could
be a distinct benefit from having fewer integration issues. Using thesame vendor for both the front end and the core banking system can
also reduce integration and interface issues considerably.
•
•
•
Suitability of IT partner for
unique requirements of the
project and its commitment to
provide long-term technical
support are crucial
Select the right mix of product
and services
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We have seen projects of even leading international vendors fail despite
excellent track record and strong technical capability. The main cause waslack of local knowledge and ability to cater to the unique conditions of the
banking environment in that country. Cost aside, the bank should selectthose vendors that involve local people in the process of customisation
and localisation, and ensure that they provide international quality whilemeeting the local standards. Vendors that have already customised a
product for a particular country are likely to be more suitable to undertakefuture projects in that country.
Finally, the bank should select a vendor that has the commitment andability to continually enhance the product so that future upgrading of thesystem would be easier. The IT partner should be one with whom the
bank can maintain a long-term relationship, both through ongoing post-implementation technical services and through future products.
•
•
Select vendors that involve
local people in customisation
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6.4 Best Practices for Vendors (forSuccessful Implementation)
Key Success Factors fo r Implementation
Banks should
develop strong
team to guide the
vendor
Develop
empathy with
business
environment
Excellent
communication
skills to
motivate and
meet resistance
to change
Develop pilot
projects to
ensure
expectation and
deliverables
match. User
acceptance
tests at all
levels
Timely data
cleaning,
migration and
integration with
existing system
with zero error
Post-
implementation
support through
ongoing
services and
future upgrades
Project Stages
Understand
unique
requirements,
expectation ofthe bank
Involve local
people to meet
unique localrequirements
User training
to adopt new
processes inwork culture
Thorough
testing at
each stage.
Develop pilot
project
Ensure
seamless
integration and
timely
implementation
Provide long
term
partnership tothe bank
Successful Implementation
Source: Asian Banker Research
What can vendors do (besides providing a good product) to successfully
implement a project of this scale? Successful implementation involves
not only timely completion but also seamless integration, zero error and
smooth transition.
We believe the basic ingredient for success is the ability of the vendor
to understand the business requirements. Clarity of banks and vendors
on both the requirements from the new system and the requisite
deliverables would lessen the risk of expectation/deliverable mismatch
and help the vendors to customise and localise the system as per the
unique requirements of individual projects.
Vendors should ensure that within the bank, there is strong business
ownership, management involvement and a business environment
conducive for implementing the project. There must be a common ground
for decision making, where the banks and service providers can interact
to find solutions for inevitable hiccups. The aim is to meet the objectives
and achieve timely completion coupled with high quality, but balanced
with the costs involved. It is important that the right mix of people within
the bank is involved in the process.
•
•
•
Understand the business needs
Ensure strong business
ownership for project within the
bank
Develop empathy with working
environment
Begin user training even before
deployment of system
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Vendors need to ensure optimum utilisation of communication channels.
Besides having domain knowledge, the service provider has to develop
empathy with the working environment and culture to meet the unique
local requirements. Allocation of the right expertise is crucial. Equally
essential is that the vendor selects its partner carefully and chooses
one that has the requisite expertise. In addition, when there are multiple
vendors in a team, the accountabilities, responsibilities and decision-
making process must be clear and a ”prime vendor” must be identified.
Technical skills to integrate the existing systems and migrate data
from old to new system are indispensable, but equally important are
communication skills for user training and change management. User
training should begin much before implementation to ensure smooth
transition. The vendor should conduct seminars and training sessions
for users in phases, with the involvement of a strong internal team from
the bank.
Internal processes within the bank need to be redesigned and aligned
with the capabilities of the new core banking system. Application- and
process-specific initiatives can bring about cost savings as well as
improve ef ficiencies by redeploying resources and enhancing the quality
of products and services.
Testing of new core banking systems on a smaller scale prior to across-
the-board implementation is one way of minimising risk and evaluating
the effectiveness of the system. We believe that implementation of large
projects should be done in phases with repeated parallel testing at
each step. A good strategy could be to implement in pilot branches and
conduct business acceptance tests before rolling out on a larger scale.
While the testing should be thorough, it should not be overly long or else
it could delay the process and increase the costs. A right balance needs
to be struck. At any stage of the project, if changes become necessary,
then the vendor and bank should re-evaluate the project. Sign-offs at
each stage can facilitate this process.
Finally, IT vendors should take a long-term perspective while implementing
the project. Continual upgrading and ongoing support services are critical
requirements for a long-term relationship with the bank.
•
•
•
•
•
Redesign processes within the
bank for optimum returns
Conduct testing and user
acceptance tests at all levels
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7Unique Core BankingReplacementConsiderations
This section covers the unique business considerations, functional
requirements and key challenges faced by different typesof banks. Going further, we have also analysed the problems
and system demands from unique situations like mergers and
acquisitions.
Unique Core Banking Replacement Considerations
7.1 A large multinational bank7.2 A small commercial bank
7.3 An Islamic bank
7.4 “Internet only” banks
7.5 Mergers and acquisitions of banks
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7.1 A Large Multinational Bank
Unique Requi rements
• Complex transactions across geographic locations and multiple
functions
• Requires scalable system with proven technology and reliability
• Integration with the existing system and seamless connectivity
across functions
• Multinational, multilingual capability
• Architecture that provides agility and flexibility but also robustness
and reliability to handle large volumes
• Maintaining smooth operations during transition
Source: Asian Banker Research
Key Challenges
• Business process restructuring and change management are
difficult propositions in old organisations with deeply-ingrained work
culture and processes
• Data migration tends to be more difficult due to geographic
dispersion and high volume of business
• User training is generally more time consuming
• Coexistence of two systems during transformation process
• Multiple application systems and software across the organisation
need to be integrated
• Single product may not suit complex requirements and may
demand significant customisation
Source: Asian Banker Research
For most top-tier large banks, the key consideration for replacement
has been to overcome the limitations of their antiquated legacy system
and disparate systems with spaghetti structures caused by extensive
middleware and multi-application connectivity. Thus the banks essentially
•Replacing core banking system
in large multinational bank is
highly complex
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Unique Considerations
need to eliminate duplicated systems, integrate systems across multiple
functions, add functionality in the core system, and improve the database
and its connectivity.
For a bank with branches across countries, millions of customer accounts
and large transaction volumes, core banking system replacement is a
massive project which requires a very strong business justification. Most
large banks take years to reach a decision on core banking replacement.
It is a multi-year project where clarity on system requirements is vital.
The banks need to determine whether a front-end replacement would
suf fice or they require core banking replacement as well.
Most off-the-shelf systems are not suitable for the volume and unique
requirements of a large multinational bank, and hence substantial
customisation of the packaged solution is necessary during
implementation. However, a better approach would be to customise the
front end rather than the core processing system. This would make it
imperative for the bank to either utilise the services of an experienced
system integrator (e.g. SBI) or undertake further development on existing
systems to meet its complex needs (as in the case of HSBC).
The platform of choice for large banks should be mainframe, which hasproven its ability to meet scalability needs and handle large transaction
volumes. As most large banks have legacy systems that are based on
mainframes, this would make transition more feasible and lower the
switching costs.
The requirements from a system should reflect long-term strategic goals of
the bank. The banks essentially need systems that are integrated across
functions and locations to facilitate the implementation of competitive
strategies with a customer-centric view. This may demand customisation
on the front end and transition to a component-based banking system
architecture such as SOA.
The functionality across multiple operations has to be complemented
with stability, reliability, scalability, robustness and flexibility to enable
the bank to introduce new products and services with ease and speed.
Compatibility and integration of multiple applications throughout the
organisation is essential for large retail banks.
We believe that past experience with similar large projects and reliability
would be critical considerations in vendor selection. Long-term support
would be essential, whereas pricing is not likely to be a key issue.
Many large banks have systems that were developed in-house. But often,
the people who developed these systems (or know the software codes)
•
•
•
•
•
•
•
Banks need a scalable and
robust system to handle high
volumes
Vital requirement is seamless
connectivity across functions
and locations
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are no longer with the organisation. This makes the tasks of deployment,
data conversion and data migration extremely dif ficult for the vendor.
Implementation will probably be a drawn-out process lasting several
years. A gradual or phased approach would be the most suitable, with
step-by-step implementation and testing at each phase. We recommend
that banks conduct pilot projects before deployment. Cost and schedule
overruns are likely due to the complexity of the process. Each stage of
implementation should have a sign-off to ensure timely completion as
per requirements. Maintaining smooth operations during implementation
and coexistence would be a big challenge.
User training and change management are likely to be dif ficult due to
the extensive scale of the project, users being spread across geographic
locations and functions, and deeply-ingrained work culture. Most banks
would thus prefer a system that can be seamlessly integrated within
the organisation so that the change process is smooth. Integrating
and improving processes and transforming the work culture would be
essential for optimum returns from the new system. We advise banks to
undertake process and product rationalisation exercises along with the
replacement in order to achieve the best outcome.
Having strong management support to see the project through and strong
internal teams to coordinate with vendors and communicate within the
organisation would be essential for a project of this scale.
•
•
•
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7.2 A Small Commercial Bank
Unique f eatures
• Less complexity and smaller
scale of operations
• Lack of trained IT manpower • Investment size and cost savings
are critical considerations
• Smaller geographic spread and
fewer number of branches –
faster implementation
• Outsourcing a feasible option
System requirements
• Need agility and flexibility from
system
• Capability to innovate anddifferentiate products and
services
• Compete on basis of cost
effectiveness
• Need integrated and centralised
system
• Likely to need services for
customisation and localisation
A small commercial bank
Source: Asian Banker Research
A small bank with a modest asset base and localised operations has
its own unique business considerations for selecting a system vendor
and service provider. Most small banks see cost as a critical business
consideration and essentially require systems that have a low cost of
ownership, particularly in terms of operational and maintenance costs.
To retain competitiveness, most banks need flexibility and agility from
their systems to be able to provide differentiated products and to roll
out products with speed. A customer-centric system that can help the
banks to focus on fee-based transactions and product innovations
to tap consumer demand is important. This can be achieved througharchitectural integration and SOA. Market penetration through cross
selling, product bundling and product innovation is likely to be an
immediate consideration of these banks. In addition, they need scalability
so that the system can cater to growing volumes.
While mainframes are proven technology across the globe, UNIX
may also be feasible for small banks as their scalability and volume
requirements are low. Due to manpower constraints, most banks do
not have the ability to develop the software internally and thus prefer
packaged solutions. There has been an increasing trend among smaller
banks to acquire integrated solutions to take advantage of end-to-end
•
•
•
Competitiveness through
flexibility and cost effectiveness
are considered essential for
growth
Small banks can take
aggressive approach by
adopting new-generation
technology and big bang
deployment
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integration through a single product and vendor (which may be dif ficult
for the scale of operations of a large tier 1 bank). Outsourcing is another
viable and practical alternative for many, if they can overcome the
security constraints.
We recommend that banks look for packaged solutions that have the
capability to meet their future needs. The customisation requirements
for small banks are generally less complex and hence customisation of
the front end may suf fice. The focus of these banks is likely to be the
completion of the replacement project not only in minimum time but also
at a low cost.
Implementation is less challenging than for a large retail bank. While
we recommend the phased approach due to lower risk, the big bang
approach may also be feasible in the case of a small bank. This is
largely because the level of complexity in its processes and the scale
of its operations permit the bank to adopt new technology aggressively.
However rationalisation of processes and products is necessary for
optimum returns from the project.
•
•
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7.3 An Islamic Bank
Unique requi rements
• Adaptability to conduct financial transactions in accordance with
Islamic law yet compete with conventional banking
• Flexibility to develop and support interest-free Islamic products
• Compatibility with other Islamic applications
• Cost effective and suitable for relatively small banks but scalable to
cater to rising volumes
• Multi-channel delivery, innovative products and product
differentiation capability
• Coexistence and integration with conventional banking systems
Source: Asian Banker Research
Over the last two decades, hundreds of Islamic banks have mushroomed
across the world to cater to the unique requirements of Islamic finance.
Islamic banks are common in the Middle East but have sprung up as
far away as London and the Philippines. Within the Asia Pacific region,
Malaysia and Indonesia are two countries that have shown rapid growth
in Islamic banking.
The bedrock of Islamic banking is the principle of shared risk. Interest
payment is regarded as exploitation in Islam because depositors and
lenders make money without providing labour or sharing risks. Shariah
law requires profits to be shared and bans investment in certain industries
such as those related to alcohol and gambling. It also prohibits interest
payments and the handling of money as a commodity. Hence Islamic
banks pool deposits to invest in construction, commodities trading andother businesses that do not profit from interest payments. Commercial
borrowers pay the bank and its depositors a share of their profits instead
of interest.
This requires the system to have the ability to integrate basic core banking
features with strong Islamic banking functionality. A system that can offer
sophisticated and innovative Islamic products and services coupled with
operational ef ficiency and cost effectiveness would allow the banks to
maintain an edge in a highly competitive industry. It is a niche segment
where banks need core banking systems which can facilitate the set-up
of new Islamic banks and the conversion of conventional banks to Islamic
•
•
•
Recent spurt in number of
Islamic banks has forced
the banking sector to lookfor systems that provide
compliance with Islamic law
System should have the ability
to integrate core banking
features with Islamic principles
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7.4 ‘Internet Only’ Banks
Key Requirements
• Compete with brick-and-mortar banks on basis of “new technology”
• Capability to provide product and service differentiation and
innovation to meet consumer requirements
• Cost effectiveness
• Speed to market the products and straight-through processes
• Architecture that provides flexibility and growth
• Maintain competitive edge through agility and creativitySource: Asian Banker Research
“Internet only” banks, a relatively new concept, are specialised banks
that compete with brick-and-mortar banks (conventional banks) on the
basis of convenience, lack of locational constraint and lower costs. These
banks offer innovative products and services online round the clock and
seek to do it cost effectively. As they have lower fixed, operational andmaintenance costs and the cost benefits are passed on to customers,
the fees are generally lower and the interest rates competitive.
Most of these banks are small and do not have adequate manpower to
customise and implement the core banking systems. For this reason,
they prefer packaged solutions, with cost being a major consideration
in selection. The transaction volumes are not as high as those of
conventional banks and multi-channel delivery capability is not necessary.
The front end, however, may need customisation to suit the unique user
needs for this type of bank.
These banks maintain their competitive edge through innovativeproducts and services offered online to the customers. Speed is essential
and hence system flexibility and agility are key requirements. Quick
decision-making and reduced product-rollout time are equally important.
Scalability is not critical, so a UNIX-based system may suf fice.
Competition from new entrants in the market and from existing
conventional banks has forced most of these banks to provide innovative
services at low cost and with low fee-based income. Capability to
meet this requirement is likely to be a critical consideration in system
selection.
•
•
•
•
Cost effectiveness with
flexibility for innovative products
is essential for “internet only”
banks
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Many of these banks are probably acquiring a core banking system for
the first time. Implementation is likely to be less complex and faster to
roll out than in conventional banks. Most internet banks are new and
small, making integration and data migration easier.
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7.5 Mergers and Acquisitions ofBanks
Core Banking Considerations in Mergers and Acquis itions
Problems
• Duplicate systems impede growth
• Difficult for banks to deliver integrated, customer-centric services
• Maintenance and operational costs increase
• Difficult for two systems to coexist unless restructured
Integration
• Linking the core banking systems
so that they effectively function as
one platform
• Difficult for two systems to coexist
• Time consuming and costs can be
high
• May be followed by core banking
replacement after a few years
Migration
• Systems of pre-merger entities
are migrated onto one platform
• Data migration has high risks
• Time consuming
• May be followed by core bankingreplacement after a few years
Source: Asian Banker Research
Mergers and acquisitions can be nightmares for IT professionals of the
banks involved as they are invariably followed by restructuring of the
core banking systems. This is largely because the duplicate systems
impede growth due to their high maintenance and operational costs.
Further, running two separate systems makes it dif ficult for the banks to
have an integrated view of the customer. Thus banks have to ultimately
consolidate the two systems, resulting in integrated databases and corebanking.
Restructuring can be done by two means – migration or integration. Both
the options are high risk, involve huge costs and normally take several
years to accomplish. Implementation problems may lead to errors that
can easily shake the customer’s confidence in the bank.
In migration, the systems of pre-merger entities are migrated onto one
platform. Take the example of Bank of Tokyo, whose business was
migrated onto Mitsubishi Bank’s core platform. However, data migration
can be almost as risky as a core banking replacement project.
•
•
•
M&A requires system migration
or integration, either of which is
risky and challenging
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Integration entails linking the two systems so that they effectively
function as one platform. This project can be equally challenging and
may require anywhere from six months to several years to implement. In
Japan, three banks merged to form Mizuho Bank using the integration
approach. But even as two banks are able to integrate their core banking
systems through robust middleware and other technical advancement,
customisation of the front end is likely to be essential.
Other than technical challenges in the process, it can be dif ficult to
get two banks to reach an agreement on platform, system and system
integrator. In some cases, a third approach may also be feasible, where
a financially strong purchaser installs a new core banking system within
the bank in order to meet aggressive business objectives. As we have
discussed, this would involve high costs and risks but may also result in
long-term growth for the bank if done properly.
At the end of it all, the banks must have a system that is suitable for the
transaction volumes and processing needs of the combined bank and
meets the objectives of the merger.
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•
•
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8Country Trend Analyses
This section analyses the trends in core banking system re-
placement in a few leading countries within Asia. The markettrends, demand characteristics and unique requirements ofeach country are explored.
Country Trend Analyses
8.1 India8.2 China8.3 Japan, Korea and Taiwan8.4 South East Asia – Indonesia, Malaysia, Thailand and Singapore
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8.1 India
• Most tier 1 and tier 2 banks have already
made decisions; some small banks likely to
replace their systems
• Has been quite an active market for core
banking in last 2-3 years
• Many banks have gone for centralised and
end-to-end solutions
• Leading vendors are Infosys, I-flex and
FNS(TCS)
• Banks have preferred local vendors due to
familiarity with local system, sophistication
of technology and cost effectiveness
•Fewer opportunities in future as market is
reaching saturation soon
• Data centralisation of public sector banks
and stiff competition have led to demand
for better customer service and product
enhancement
• More banks prefer open system and newtechnology
• Most Indian banks prefer changing their
infrastructure from bottom up rather than
adding applications due to archaic structure
• Preference for local vendors
• Cost is not a major consideration
• Partial replacement in some banks likely to
be followed by purchase of application
software for remaining functions
Market Trends Demand characteristics
Source: Asian Bank Research
India is a unique country from the core banking perspective. Till fiveyears back, most banks in the country were working on mere branchautomation and most state-owned banks did not even have a corebanking system owing to lack of infrastructure and network readiness toprovide a centralised system. New private-sector banks then came intothe market with a distinct technical advantage which led to substantialcustomer attrition in state-owned banks.
Competition within the banking sector of this country is rising as
foreign banks are becoming more aggressive, growing through bothacquisitions and expansion of operations. Aggressiveness of the privatebanks has thus forced most state-owned banks to replace their corebanking systems with advanced, centralised systems that are not onlycompetitive but also cost effective. In the last two years, almost 30% ofthe country’s banks (most of these being state-owned) have taken thedecision to replace their core systems. Because of this, almost 50% ofdeals in Asia during this period have come from India.
Prominent deals in the last few years include State Bank of India withTCS, Canara Bank with I-flex (for a $49 million project), Central Bank
of India with TCS (for a project costing 150 crore rupees or about $33
•
•
•
After active spell in last 3-4
years, Indian core banking
market may be reaching
saturation soon
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Country Trend Analyses
million) and Bank of Baroda with HP. As the trend indicates, most of themajor banks in the country have already entered into core banking deals.Most of them would be completing their rollout in 2007. We understandthat those who have not yet entered into deals are actively evaluatingvendors. For this reason, we believe that the Indian market is nearingsaturation.
Some banks have preferred integrated, packaged solutions. This is afeasible option for banks which are undertaking greenfield projects –and hence do not have to face the complex issue of integration with oldsystems – and whose transaction volumes are low. The preference hasbeen for local vendors, who understand local business requirements andare considered more reliable in terms of domain knowledge. Moreover,many Indian vendors now rank among the top global vendors. Theleading core banking providers within the country are Infosys, TCS (withFNS), I-flex and Nucleus Software.
A critical challenge that many banks have faced in the transformationprocess is the wide spread of branches across the country and in areaswhere networking and infrastructure capabilities are still being developed. As a result, many banks have found it dif ficult to integrate all their branches
through a centralised system. Another tricky problem has been changemanagement, as most banks are shifting from branch automation to acentralised system. In branch systems, branch employees maintainedownership of the data. However with centralised systems, some bankshave observed that their employees felt a ”lack of ownership of data”, ontop of the typical employee dissatisfaction with change in processes.
UNIX-based systems have clearly been the preferred choice as Indiahas traditionally favoured UNIX. Most of its local vendors also providesystems in UNIX.
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•
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8.2 China
Branch
Computerisation
Branch
Networking
Data
CentralisationIntegrated Core
Banking Systems
IT Infrastructure development of Chinese banks
• Increasing number of core banking deals;
leading vendors include FNS, Misys,
Temenos and System Access
• Banks treading cautiously in selection of
systems and vendors following deal failures
• Tier1 and Tier 2 banks looking for
international standards in new systems but
need systems to provide for local practices
• Many Tier 1 banks using in-house systems
and increasingly considering new
technology
• Many smaller banks still prefer local
vendors
• Increasing foreign competition as foreign
banks gain full access in 2007
• Need to keep pace with rapid growth and
market demand
• Traditional accounting system being chal-
lenged by new business and foreign banks
• Need product that meets the unique local
requirements, e.g. language, businessenvironment
• Higher costs and implementation risk due
to unique requirements; needs involvement
of local people
• Lack of prominent local vendors
Market Trends Demand Characteristics
Source: Asian Bank Research
Regulatory and market-driven competitive pressures are forcing banks inChina to consider replacing their core banking systems. Market pressurecomes from the arrival of foreign stake-holding in banks and customers
becoming more demanding on quality of services and products. Therobust growth of the Chinese economy has attracted financial institutionsfrom across the globe.
On the regulatory front, under China’s WTO commitments, foreign bankswill gain full access to its banking sector in 2007. In addition, the countryis gearing up to host the 2008 Olympics. With this background, mostbanks in the country are awakening to the need for technically advancedand competitive systems.
We believe all Chinese banks are now somewhere between branchcomputerisation and integrated core banking in terms of IT infrastructure.
Only a few leading banks like Bank of Shanghai, ICBC, China Minsheng
•
•
•
Market-driven and regulatory
pressures are forcing many
banks to consider replacing
their systems
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Bank, China Development Bank and CITIC Bank have upgraded to anintegrated core banking system.
There is increasing interest in core banking system replacement amongbanks, with many medium and small banks mulling over the decision andsome evaluating vendors. We have seen a gradual growth in number ofdeals in the last couple of years and expect the trend to continue andprobably accelerate as competition intensifies. The platform of choicecontinues to be mainframe, which is more appropriate considering thelarge branch network and high transaction volumes.
We have discovered that the uptake of core banking systems has beenslow in the country as a whole because the banks have been verycautious. Additionally, we have observed that tier 1 banks (and nowincreasingly tier 2 banks) prefer international vendors for the quality oftheir solutions and services, whereas many smaller banks continue toprefer local vendors due to the lower cost and higher level of trust andreliability. There continues to be a certain level of doubt in the marketabout the ability of foreign vendors to meet the local requirements ofChinese banks. Deal implementation problems have also been reportedin cases like CITIC Bank, whose replacement project was done by
Fiserv.
Many banks in China are looking at point solutions in, for example, tradefinance and treasury rather than at core banking system replacement.We believe this reflects their short-term objective of attracting foreignfunds.
Most banks in China have unique requirements such as ability to deliverin Mandarin and capability to customise and localise the solution tosuit their business conditions. For this reason, most vendors that areproviding solutions to Chinese banks are setting up centres in China andemploying local people.
Recent prominent deals include China Minsheng Bank by SAP, whichalso marks the entry of the global vendor into this region, Hua Xia Bankby TCS, and ICBC Beijing and Bank of Shanghai by Temenos.
•
•
•
•
•
Only a few banks have
upgraded to an integrated core
banking system
Smaller banks continue to
prefer local vendors
China presents a good
opportunity for those who have
technical capability and domain
knowledge to meet the unique
requirements of banks
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8.3 Japan, Korea and TaiwanTrend Analys is in Japan, Korea & Taiwan
• Predominantly mainframe; Cobol-trained generation will start retiring in 2007
• Most large banks have proprietary systems developed in-house
• Mergers and acquisitions have delayed core banking replacement
• Demand likely to increase due to foreign shareholding in the banking sector
• Predominantly proprietary systems; many banks have in the past preferred
in-house development but manpower is becoming scarce for such systems
• Banks now shifting towards new technology for cost effectiveness and
reduced human-resource requirement
• Banks regard the application of new technology crucial for competition
• Banks are looking for rapid product-to-market delivery and cost effectiveness
to face increasing competition
• Integration and data migration from proprietary system can be challenging
Issues and Trends in Japan
• Lack of confidence to change from legacy system among many banks
• Market opening up with several deals in 2005; many of these were for open
systems
• Require usage of traditional Chinese characters in software
• Need system to suit the unique requirements of language and business
culture
Issues and Trends in Taiwan
Issues and Trends in Korea
Source: Asian Banker Research
The level of technical sophistication among Japanese banks is one ofthe highest in Asia with most banks having basic integrated CRM. Japan
has traditionally had largely mainframe-based systems, most of whichare proprietary systems developed in-house. Reliance on these stableand robust systems has been widely accepted in the country and thus thebanks have been relatively slow in patronising the UNIX technology.
However the banks are increasingly acknowledging the need to reduce thehigh maintenance cost of these systems as the manpower for managingthem is dwindling. In Japan, this is known as the “2007 problem” as thatis the year when Cobol-trained manpower starts retiring. Another factorthat is likely to move the market is the increasing foreign share in theJapanese banking sector.
Various mergers in the Japanese banking sector have also led to complex
•
•
•
Japan
Banks in Japan are struggling
with rising maintenancecost and scarcity of trained
manpower
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systems that typically would need upgrading or replacement to reducecomplexity and improve ef ficiency. Ageing systems and competitivepressures are likely to bring about increased activity on the core bankingfront over the next few years. Interestingly, a notable trend has been theformation of smaller new-generation banks in Japan which tend to lookat new-generation technology.
Indications are there but a substantial shift towards undertaking thisrisky venture is yet to be seen in this country. According to one leadingvendor in the region, “Japan market will move in 2-3 years. They havenot reformed their financial services sector yet. It is coming very slowly.Once it is done, then we will see a change in reforms, change in attitudein both public and semi-public sectors. Nothing in Japan happensquickly.”
We believe that technical advancement among banks in Korea hasreached integrated core banking and robust middleware. Till a few yearsback, most banks in Korea used mainframe-based legacy systems. Butin the last few years, there has been an increasing shift towards UNIX-based systems. The new regulatory environment requires banks to havestringent capital coverage and risk management policies. These new
rules, high cost of maintenance and ageing technology are believed tobe the critical factors driving the shift.
Competition in the market is intense and banks need to be ef ficient andcost effective in order to gain an edge. For this reason, most banksare looking for architecture that not only meets their current businessrequirements but is also scalable to cater to future growth. Nonetheless,the complexity of tasks involved in replacement and integration is a keydeterrent for most banks. Historically banks have preferred to build theirsystems in-house, but we are seeing an increasing shift in favour of ITcompanies.
Taiwan is one of the few countries where there was a sudden surgeof activity in 2005, with four banks going for core banking deals ascompared with 2004 when there were none. We believe that most banksstill lack the confidence to change from legacy systems, but competitivepressures are forcing them to look for newer-generation technology.
Our research shows that technical advancement in the banking sectorof this country is currently at data centralisation and integrated corebanking. Now the banks are poised to take the leap towards integratedCRM in order to achieve total customer centricity. As there is alreadya level of technological sophistication among these banks, they do not
feel the urgency to take a replacement decision, but competition and
•
•
•
•
•
Korea
There is increasing shift
towards new-generation
technology among Korean
banks
Taiwan
Taiwan offers a good
opportunity to IT companies
with its increasing shift towards
open-end technology
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consumer demand have been driving the shift.
Recent core banking replacement decisions have been in favour of theUNIX platform. However, in most cases, a critical consideration has beenthe ability to suit the unique requirements of language and businessculture in Taiwan. The latest prominent deals include Cathay UnitedBank by TCS-FNS and Ta-Chong Bank by I-flex.
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about every 15 years. They are [returning] to that; it is time to look andreplace again. There is no economic pressure; it is just retirement andrenewal strategy.”
In Malaysia, in the last three years, we have seen many small andmedium banks coming to the market to replace their systems. Many ofthem have chosen vendors that can provide them with Islamic bankingcapability. For this reason, local vendors such as Microlink and Silverlakeare popular in the country. We understand that the leading bank ofMalaysia, Maybank, is also in the process of evaluating vendors forchanging its core banking system. Given the small size of the country’sbanking sector, the change is noticeable. The aim of the banks is to haveintegrated core banking systems.
Many experts consider Singapore a rather mature and saturated market.Banks in the country have already achieved technical sophistication intheir banking systems. Since there is no urgency to change, the bankstake considerable time in making a decision.
We have seen very few deals from this country lately. The only prominentone in recent times is DBS Bank – in 2005, the bank appointed Infosys
to provide an integrated system for its domestic retail operations.
Technical advancement among smaller banks in Indonesia leaves muchto be desired, with some of them still working on branch computerisation.Some technically advanced banks have set up a centralised data system.We believe that many smaller banks in Indonesia continue to operate oninef ficient legacy systems and are spending a lot of money and time tomaintain them. The skills to operate these systems are disappearingas most young graduates prefer to work on an open system while theolder people are retiring. Hence maintaining these systems is becomingmore problematic. The platform of choice has mostly been mainframe,but there are indications now that banks are considering UNIX systems
as well.
However change has not been easy to come by. We have not seenmany prominent deals from Indonesia in recent years. But we expect themarket to open up in the next 2-3 years owing to increasing inef ficiencyand competitive pressures.
•
•
•
•
•
Many Malaysian banks look for
capability to adapt to Islamic
banking
Singapore is a saturated market
Many banks in Indonesia
continue to operate on high-
cost legacy systems
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9 Vendor Assessment
This section examines the current standing of vendors in the
Asian markets and ranks them. A survey across banks in Asiacoupled with our in-depth analysis of the products and the deals
implemented by the vendors in Asia have assisted us in rating
them, both on their abilities and on their product’s capabilities.
Besides this, we have analysed their market positioning based
on their success and architecture.
Vendor Assessment
9.1 Vendor and product assessment9.2 Market positioning
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9.1 Vendor and Product Assessment
Our Assessment of Vendor and Their Product
The key vendors in the region and their core banking products have been
analysed based on a survey done across banks in Asia. This has been
complemented with our research into their products, track record and
financial strength and a quantitative analysis of the recent decisions.
We have divided our assessment into two parts. First is vendor assessment
based on four parameters and second is product assessment based
on five parameters. The analysis has been done for only core banking
systems and not other solutions.
Vendor assessment – methodology
Reliability – Reliability of the vendors in the region has been judged
through a survey done across banks in which they rated the vendors
based on their level of trust in each vendor’s capability to meet project
deadlines and commitment to the project. We have complemented this
with our research into the vendors’ track record, number of projects in
the last two years and number of years in business as well as the parent
support of these organisations.
Financial strength – We have assessed the financial strength of
vendors on the basis of theirfinancial standing in absolute numbers and
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Vendor Assessment
their growth over the last three years. The analysis has included key
indicators such as revenue, operating profit, net income and net worth,
among others.
Current presence in Asia – The vendors’ presence in Asia has been
judged on the number of core banking deals that they acquired in 2004
and 2005. The spread of these deals across Asian countries has given
us a background on the number of countries where the vendor has
managed to make its presence felt. This has been complemented with
research into local presence through of fices.
Implementation capabilities – The assessment of implementation
capabilities has been based on our analysis of the number of successfully
implemented projects in Asia in the last two years and our research into
the reputation of the vendors on their implementation track record.
Product assessment – methodology
Abil ity to meet un ique needs – The assessment of this quality has been
based on a market survey where banks were asked to rate the product on
its ability to meet their unique and specific requirements while providing
international quality. We have further analysed the local presence of the
product in individual countries and the success of customisation.
Product support – This has been analysed through a survey where
bankers were asked to assess the product on post-implementation
support services.
Presence among big banks – The presence of vendors among large
banks in Asia has been determined based on the number of deals that
the vendors have won in recent years from large Asian banks. The
suitability of the product architecture to meet the requirements of large
multinational banks has also been analysed.
Deals with small banks – The presence of vendors among small banks
has been assessed on the number of deals won by the vendors for small
and mid-size banks in Asia.
Market perception of product – A survey done recently among Asian
banks has enabled us to assess the market perception of the product
based on its functionality and architecture.
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9.2 Market PositioningProduct Positioning – As we see it
High
Architectural
Advancement
Market Penetration
SOA/RDB
Low
Traditional/
Flat-file DB
Unproven Emerging Leaders
Niche Players Ageing Architecture
X = Fidelity Core Bank X = Temenos Core Bank
U = I-flex
U = InfosysU = TCS Bancs
U = Temenos Globus
A = Fiserv
U = Fidelity Sanchez
A = Silverlake
X = Fidelity Systematics
Legend
X = Mainframe
U = UNIX
A = AS4000
Source: Asian Banker Research
The product and vendor positioning is based on our assessment of
architectural advancement (progression towards relational database andSOA) and market penetration of the products across banks in Asia.
Unproven – This segment consists of those products that have no
significant history of implementation in Asia and hence market penetration
is rather low. However the prospects look good, as the architecture is
relatively new and more flexible. There seems to be only one product
in this category and that is Fidelity Corebank, a mainframe-based core
banking system.
Emerging leaders – This segment comprises those products that are
technically advanced and have higher market penetration following
implementation across banks in Asia. We believe that the architecturaldevelopment of Temenos Corebank and Fidelity Corebank is somewhat
similar, but Temenos has made more progress in the region in the last
few years. We thus see it as an emerging leader in mainframe-based
systems.
Ageing architecture – The products that have high market penetration
among Asian banks but also architecture that is relatively old belong
to this segment. Our classification of new architecture implies products
that have relational database and are more suitable for Service Oriented
Architecture. In contrast, old architecture is used for those systems that
were built long ago and have a traditionalflat-
file database system. Since
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their inception, some of these products have undergone architectural
changes and a certain level of technical advancement. As these products
have been in the market for a long time, their market penetration is
considerably high. Many UNIX systems such as Infosys Finacle, TCS
Bancs and I-flex Flexcube are in this segment. Among mainframes,
Fidelity Systematics is also positioned here. Fidelity Systematics had
high penetration in the market a few years back, but in recent years it
has not had any major implementation in Asia.
Niche players – The products in this category specifically cater to
niche segments such as wholesale banks and small retail banks.
Understandably, their market penetration is lower. For example, we
believe Globus of Temenos is more of a wholesale banking package,
while Fiserv ICBS and Fidelity Sanchez are more suitable for smaller
banks.
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10Conclusions
Our research leads us to certain conclusions on success in core
banking which we discuss here in two sections. The first is forbanks where we identify the critical requirements to achieve
success with the core banking systems project. The second is for
IT service providers and delineates essential factors to achieve
long-term success in the core banking systems market.
Conclusion
10.1 Conclusion 1 – For bankers10.2 Conclusion 2 – For vendors
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10.1 Conclusion 1 – For BankersSummarising Success Factors for Banks
People and workculture adaptation
Embrace change management
Strong leadership & decision making
Management and business commitment
Clear business d irection, goals and business intelligence
Source: Asian Banker Research
We believe that the following elements are essential for a successful
core banking project.
The bank must have clear business direction and goals, which would
be the guiding principles for all stages of the project from selection
to implementation. This would also ensure that the project has
adequate justification and support from the business perspective and
the implementation does not stray from requirements because of
enamouredness with technical enhancements.
To ensure that the project has management commitment at all times,
there should be adequate business ownership and decision making
should involve people from business functions. We believe that strong
project sponsorship from top management is critical for its success.
Viewing the project as just an IT project would be a recipe for failure.
The bank should also develop strong internal teams to communicate
and coordinate with the service providers to ensure deliverables match
the business objectives.
There is bound to be resistance to change and employee dissatisfaction,
which can only be countered through effective communication and
•
•
•
•
Lack of business commitment
and willingness to adopt
changes within bank can
lead to failure of even well-
implemented projects
Have clear business goals
Ensure total business
commitment at all times
Effective communication
is essential for change
management
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developing the right business environment. Internal teams should be
developed to conduct training and overcome employee resistance.
For the change to yield optimum returns, it should be adopted at all
levels within the organisation. The bank should shift from old world to
new world in entirety. Product rationalisation and process restructuring
would facilitate optimal utilisation of the new system and thus should
accompany this transition. Failure to do so would lead to old processes
being tied to the new system and eventually a mismatch between
expectations and deliverables.
•
Conclusion
Process restructuring and
product rationalisation should
accompany the process
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10.2 Conclusion – For VendorsSummarising Success Factors for Vendors
Reputation, trackrecord
Partners in proj ects, not just
vendors
International quality standards
meeting local needs
Technical enhancements
Long term commitment to business
Source: Asian Banker Research
For long-term success, it is essential that service providers see eachproject as a long-term relationship. Besides maintaining high technicalstandards, they need a track record of successful implementation. Everyproject has its unique characteristics and requirements which need to beaddressed with utmost diligence.
Having the right people with domain and business knowledge to suitthe local requirements of individual projects is essential for successfulimplementation. An army of men cannot replace a few critical people.Needless to say, the technical ability and track record of the vendor
are most critical in the selection process. Service providers must investcontinually in technical advancements. Equally important is catering tothe local conditions while providing international quality in the productand services.
Ensuring that deliverables are in line with the expectations of the bankrequires clear communication at all levels. This would involve usertraining and the challenging task of managing process and work-culturechange within the bank.
There should be fool-proof testing at each step in addition to otherstrategies for risk minimisation. Successful implementation of eachproject is a step in building the market presence and reputation of the
service provider.
•
•
•
•
Long-term commitment to
enhance product quality and
“partnership” role in project are
crucial for success of IT service
providers
View project as long-term
relationship
Employ right people with
domain knowledge
Ensure deliverables and
expectations match through
effective communication
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A1 Appendix ICase Studies
Case Studies
A1.1 State Bank of India A1.2 Union Bank of Philippines
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Case Studies
revamping its core banking system. It initiated the plan with transformationin 3,300 branches in year 2000. But thereafter, the change process wasextended to include 5,000 branches of four associate banks as well.
The key motivation for the bank to purchase a new system was thedesire to have a local framework in which IT could serve as an “enablingforce” and relieve the local branches of back-of fice operations therebyallowing them to focus on delivery and marketing. And this was possibleonly if the bank had a centralised core banking system and made itsbranches a service and delivery channel. Multi-channel delivery withoutcore banking was not practical.
The Timeline of the Transformation Project
Apri l
2007
Augu st
2006
Apri l
2006
2004200320022000
Implementation
completed
85% of Business
migrated to new
system
3,000 branches
(50% bank's
business)
migrated200 branches
migrated
Implementation
process begins
at pilotbranches
Selection
process.
Preparing RFPtook 6 months
Project
Conceptualised
with KPMG as
consultant
Source: Asia n Banker Research
However, when the bank started to consider replacing its system, therewere very few examples. It wanted proven technology for its systembut there was none. Not even Bank of America and other big globalbanks had undertaken such a change. Its size was the key issue andit needed a system that could cater to its growing needs. (Togetherwith its associate banks, SBI now has 15,000 branches and 140 millionaccounts in total.)
The whopping project for transformation of the domestic business
was conceptualised in 2000 with KPMG as the consultant. The actualprocess of selection began in 2002 as the bank developed a matrix ofcriteria (10,000-odd points) for system and vendor selection which hadto be approved by the government (SBI being a state-owned bank). Ittook almost six months for it to prepare the request for proposal. Theselection after the RFP was issued took another two months. As it wasa public bank, the selection process was bureaucratic with approvalsneeded from regulators. Technical bids were sought through the requestfor proposal followed by financial bids. Suitable vendors were selectedbased on the technical bids and their pricing was one of the final decisivecriteria.
•
•
•
The selection process
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FNS Bancs was considered the most suitable to meet the bank’srequirements. TCS was chosen as system integrator as it had the distinctadvantage of being aware of local business practices, work culture andregulations and thus was well-placed to understand the requirementsof the bank. Strong alliance between FNS and TCS was another factorthat contributed to the selection of FNS as the vendor. This, however,meant moving to the UNIX platform which was relatively less proventhan mainframe for a bank of this size.
Owing to the size of the organisation, the customisation of software andthe user training and training for implementation were, in that order, thetwo most dif ficult tasks faced by the bank and the service providers.Unique requirements of the bank such as having to maintain branchindividuality while centralising the systems posed significant challengesin customisation. Its validation and process-adaptation requirementsforced further customisation.
The original product from FNS which had about one million softwarecodes was customised into a more complex hybrid product with almosttwo million codes. This extensive addition to the software code of theproduct was done by TCS and the system now covers 4,000 transaction
types.
Because of the complexity, pilot projects were implemented. The taskof migrating data from the old system to the new system had to achievetotal migration and reconciliation with no loss of data. A bank with tenmillion transactions a day has no room for error or else customer attritionand loss of reputation can be extensive.
The deployment, which is still in progress, is being done gradually overall domestic branches and the branches of four associate banks. Thisinvolves a total of 8,000 branches, a scale seen by very few banks inthe world. The bank implements the new system over 40 branches in a
day.
SBI is a typical example where the time-consuming work of training staffand educating users is conducted in-house, a process which will takeyears to complete and require a huge amount of resources. SBI hasformed a strong in-house team to work with the vendors on deploymentand implementation.
Change management within the bank has been a whopping task. Theingrained culture of the organisation is undergoing a total transformationas the bank moves from an independent branch system to a centralsystem. This has led to users feeling a ”lack of ownership of data”, unlike
•
•
•
•
•
•
•
Customisation and
implementation process
The deployment was phased
The change management
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previously where there was an entrepreneurial feeling as they managedthe system and customised it to meet unique local requirements. Thisdemanded a strong acceptance of change management within the bank,with staff roles changing and business processes being restructuredacross all users. SBI met this challenge through strong internal teamsand effective communication. The change process is likely to continueeven after the new system has been fully implemented.
By mid-2006, 85% of the bank’s business would have been transferredto the new system. By March 2007, SBI expects to have rolled out itscore banking system to almost all of its domestic branches and those ofthe four associate banks.
Despite the substantial cost, time and resources employed in the process,we believe that it was imperative for the bank to shift to a newer system.Before the change, its attrition rate was high with private banks garneringhuge market shares thanks to their technical advancement. The cost-to-income ratio of the bank is already showing significant improvement.We expect this new system to give a strong boost to the bank’s futuregrowth. However the effectiveness of the system for such a large bankcan only be seen after it has been implemented across all branches.
For its international operations, the bank recently chose Infosys toprovide a single integrated solution across all branches as it felt thatTCS’s resources were already tied up with its domestic project. It isalso believed to be implementing a new trade solution. In addition, thebank is undertaking a business process restructuring exercise in orderto improve its ef ficiency. With all these initiatives, SBI should remain aformidable player and retain its stronghold in the Indian market.
•
•
•
The outlook
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A1.2 Union Bank of PhilippinesSWOT Analysis
Strengths
Threats
Weaknesses
Opportunities
Relatively small bank with 111 branches,
making replacement less complex
Willingness and adaptability to change
from mainframe legacy to new technology
Willingness to take risks to improvecompetitiveness
Data migration from multiple existing
systems and integration was complex
Data cleanup was difficult as Finacle
required some parameters which old
system did not have
Lack of in-house IT manpower. Cost also
an issue
Centralised the back-office operations with
the new system
Growing economy. Acquisition of new
customers and markets possible through
differentiation of products and services
Availability of multiple vendors for open
technology made choice easier
Lower TCO in new technology
Shifting from legacy to open system
required change in processes and
business culture
New system required extensive user
training and acceptance at all levels
Big bang approach has higher risks. Tried
for first time in the country
Source: Asian Banker Research
Union Bank of Philippines (UBP) is a relatively small bank with an assetbase of $1.98 billion and 111 branches in the country. However it is amongthe top ten banks in the Philippines, with a history of fast growth thanksto its tech-savvy approach. True to its reputation, UBP has become thefirst bank in the country to shift from mainframe to open platform.
The bank had an existing legacy system (from Systematics, running onrefurbished mainframes) which was ten years old. The key problems
faced by the bank included high operational costs and dif ficulty in buildinginterfaces. The bank then realised the need for a simpler system whereinterfaces are not an issue and total cost of ownership is lower.
The change was also prompted by the need to acquire business agilitycoupled with improved ef ficiency and to have the ability to differentiateits products and services. Being in a competitive environment, the bankworked on a tight margin hence cost was an essential consideration.With these issues in mind, the bank started exploring the possibility ofshifting to a newer technology platform in 2002.
•
•
•
The old system
Cost a critical consideration
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The Timeline of the Transformation Project
Apri l
2005
Apri l
2004
4 Qtr
20031 Qtr
2003
2002
Implementation
is completed
Implementation
begins with user
training
Selection
process
completed.
Finalises Infosys
Requests for
proposalfrom vendors
Explores
possibility of
shifting from
mainframe to
open platform
Source: Asia n Banker Research
In 2003, the bank invited proposals from leading vendors that couldmeet its technical requirements. The process of selection took sixmonths, during which the bank analysed all the proposals and bids andvisited two Infosys project sites in India. The bank viewed the ventureas the beginning of a long-term partnership and made the selectionaccordingly.
The selection criteria included the functional features of the system, thequality of the team and the track record of the vendor company. Whiletechnical capability of the system to meet the objectives was essential,
cost was also considered to be a critical factor. Infosys presented astrong business case following a Gap analysis.
The bank finally selected Infosys to provide the system Finacle forits retail operations (CASA, loans, deposits and GL). Local firm TotalInformation Management Corporation (with whom the bank has a long-term relationship) was also hired to provide consultation and assistancein implementation. The project involved replacing its mainframe-basedlegacy system with a new-generation open-ended system which runson Sun infrastructure. For Infosys, this was its first big project in thePhilippines. For this reason, involvement of a local partner was an assetfor the bank as well as the vendor.
The project cost was about $4 million. One of the key considerations forthe bank while selecting a system was the financial impact. It wanteda system whose cost could be met through the operating profits of thebank over a period of five years. In addition, the new system should havelower operational costs, thus leading to better returns for the bank.
Implementation took approximately one year and the system wentlive in April 2005. The implementation posed many challenges suchas localisation and customisation to unique business conditions of thePhilippines. In addition, data stored in multiple mainframe-based systemshad to be cleaned, migrated and consolidated. Some of the items that
Finacle needed were not found in the old system, making the task moredif ficult.
•
•
•
•
•
The selection process
The new system
The implementation and
deployment process
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The project was significant for the Philippine banking sector because itwas the first time a local bank shifted from a mainframe-based system toopen technology. For this reason – coupled with the fact that it used ”bigbang” implementation – it was keenly watched by many in the industry.
The bank took an aggressive approach by adopting big bang, which wasless time-consuming but came with high risk. Most banks, especiallylarger ones, prefer a traditional step-by-step rollout due to lower risks.However owing to the relatively small size of the bank, big bang wasconsidered achievable and more feasible. The advantage in this approach
is the avoidance of integration issues that arise from having two separatesystems co-existing within the bank during rollout. The implementationis fast and would not slow the bank’s transformation process. The bankfelt confident that it could implement the project according to scheduleand it succeeded.
One of the strengths of Union Bank of Philippines has been its adaptabilitytowards new-generation technology. It is considered a tech-savvy bankand has proven so by being among the initial few in the country to stepout to replace their entire system. The bank developed an in-house coreteam which worked with the Infosys team to fulfil the implementation
plan and to train users for the change in processes.The success of Union Bank of Philippines in its core bankingtransformation has some lessons for other banks undertaking similarprojects. The management should be committed from conception to finalimplementation. This is required of both the bank and the vendor andwas one of the critical success factors for the bank. The bank developedstrong teams with good banking knowledge and got them trained forthe new system to ensure optimum utilisation. The bank faced a certainamount of resistance and “getting everybody on board” was a challenge.Most banks in the Philippines continue to operate on legacy mainframes.For these banks, UBP has been an example to look up to.
With the new system, the bank aims to reduce its cost by 15% over fiveyears. If achieved, this would give it substantial competitive advantage.Moving from account centricity to customer centricity should help itprovide better customer service and improve its market presence. Thebank has discovered that with the parameterisation of the system, it canlaunch new products much faster and with ease. The cost of interfacingis also lower. In addition, the bank did away with the branch IT networkfollowing core banking replacement. With the new centralised system, thebank freed up resources previously engaged in branch IT infrastructure. Additionally, the centralisation of back-of fice functions should give aboost to its competitiveness
•
•
•
•
•
Lessons learnt
The outlook
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A2 Appendix II An Average Request forProposal
An average RFP runs into 70-80 pages, with the bank requiring
vendors to submit a whole range of information which wouldassist the bank in evaluating the suitability of the system for its
requirements. While some in-depth information is essential to
analyse the product and the vendor, we believe that unnecessary
information simply increases the complexity of the process. Banks
often forget that somebody with the right breath and depth of
knowledge needs to read and analyse all the responses to an RFI
or RFP. For a vendor providing this extent of information, it usually
becomes an unwarranted exercise. For this reason, we believe
that banks should ask for only relevant detailed information. In-
depth critical information gained through a few questions may be
more useful than a “laundry list” of non-essential information.
What follows is a sample of the table of contents of an average
RFP. Often, the RFP is accompanied by a worksheet that
requires vendors to provide information on 800-900 parameters
which include vendor profile, technology, product, customer
information system, general information, security, and loan and
deposit system information. However, as this worksheet is very
extensive and specific to each bank’s requirements, we are not
providing a sample of it in our report.
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Table of contents A. Introduction
1 Bank profile
1.1 Vision
1.2 Mission
1.3 History and background
2 Bank products and services
3 Purpose
4 Eligibility requirements
4.1 Eligible vendors
4.2 Eligible products and services
4.3 Cost of this request for proposal
5 Definition of terms
B. Request for Proposal (RFP) Process
1 RFP contact details
2 Overview of the RFPprocess and schedule
2.1 RFP process
2.2 RFP schedule
3 RFP documents
3.1 Clarification of RFP documents
3.2 Pre-submission conference
4 Vendor proposal preparation
4.1 Language
4.2 Statement of compliance
4.3 Vendor proposal conditions
4.4 Vendor proposal validity4.5 Format, signing and packaging of vendor proposal
4.6 Pricing
4.7 Payment terms and conditions
5 Submission of the vendor proposal
5.1 Sealing of the vendor proposals
5.2 Reserved rights
6 Vendor proposal Evaluation
6.1 Confidentiality of the evaluation process
6.2 Clarification of vendor proposal
6.3 Examination of vendor proposal and determination of
responsiveness
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Average Request for Proposal
6.4 Evaluation methodology
6.5 Bank’s right to accept or refuse any vendor proposal
7 Award of contract
7.1 Post-qualification
7.2 Award criteria
7.3 Reserved rights
7.4 Notification of award
7.5 Signing of the contract
7.6 Performance security
7.7 Corrupt or fraudulent practices
C. Commercial Terms and Conditions
1 Standard terms and conditions
2 Other terms and conditions
2.1 Responsibility
2.2 Delivery
2.3 Storage
2.4 Transportation, marking, labeling, packing and shipment
2.5 Transfer of risk and title
D Background and Vendor Proposal Requirements
1 Background and vendor proposal requirement
1.1 Background
1.2 Overview and scope
1.3 Architecture
1.4 System demonstration requirements
1.5 Reference site visit requirements
1.6 Pilot testing requirements
2 Implementation plan
3 Maintenance and support
4 Vendor’s expectations from bank
E. Financial Vendor Proposal Requirements
1 Overview
2 Price
3 Payment terms and conditions
3.1 Payment milestones
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3.2 Payment due dates
3.3 Payment conditions
F. Statement of Compliance (Requirements Matrix)
1 Answering the requirements matrix
2 Requirements matrix
3 Executive summary
3.1 Instructions3.2 Summary of technical proposal
4 Organization and support
5 Application and support
6 General features
7 Business requirement
7.1 Customer information system
erage Request for Proposal