Core banking systems - A necessary evil?

Upgrading core banking systems is not something any banks does lightly. Migration to new systems can take years to bed down and 'Big Bang' migrations have more often than not resulted in disaster.

So if one of the major banking and payments technologies providers in the US, Metavante Corporation and one of Europe's leading core banking systems vendors, Temenos, starts telling US top-tier retail and commercial banks, that time is running out and that 20 to 30 year-old legacy systems need to be upgraded, do you sit up and take notice or bury your head in the sand for another 10 years?

So far most banks in developed markets have opted for the 'ignore it and it will go away' approach to core banking systems replacement. According to a 2006 study conducted by Aite Group, approximately 12% of U.S. banks and the top 500 credit unions have reached a critical point for core system replacement. "They are paying high maintenance costs, and they suffer from slow product launches and an inability to easily integrate third-party applications or access information for compliance to new regulations," Aite writes.

Yet, despite the need for new systems, only 4% of U.S. banks and top 500 credit unions were expected to deploy a new core banking system in 2006. Of these deployments, 90% were by small U.S. banks and credit unions. Hardly a resounding vote of confidence in core banking systems replacement, which means any vendor trying to penetrate the US market may run into a brick wall.

Despite these challenges, Temenos, a leading European and emerging markets provider of core banking software, with a relatively small footprint in the US market, has set its sights on growing its US market share. However, recognising the "barriers to entry" in the US, it opted not to go it alone. Instead it is partnering with US-based Metavante Corporation, which provides banking and payments technologies to more than 8600 financial services firms worldwide.

Metavante counts 91 of the top 100 US financial institutions as its customers and as part of its strategic alliance with Temenos, it will "co-develop" an "advanced US global banking platform," based on Temenos' TCB retail processing solution for large-scale retail and commercial banks. Michael D. Hayford, COO and CFO of Metavante said they were attracted to Temenos' technology because of its multilingual, multicurrency, 24 x 7 processing capabilities, components US banks were missing.

Metavante will be the exclusive US provider of the "new advanced TCB platform," and in those banks that already use Metavante's core banking software, it will be replaced with components from the TCB product. Temenos and Metavante will initially target the top 50 US financial service providers with their new US global banking platform, which can be licensed or outsourced via a service bureau.

But what makes Temenos and Metavante think that their offering will be enough to convince US banks to upgrade 20 to 30-year-old legacy systems? By combining Temenos' advanced technology with Metavante's US banking knowledge, existing customer base and outsourcing experience, both companies believe it is a recipe for success.

Metavante and Temenos' approach in the US market is to encourage banks to replace core banking systems, component-by-component rather than a more riskier 'Big Bang' approach. And its outsourcing offering will certainly reduce the upfront investment for some banks.

Metavante maintains US banks no longer have any choice but to upgrade. "Large US banks have invested in nice front ends and bolted on interfaces to hide this back office functionality which is still running the way it has for a long time," says James Dempster, CTO, Metavante.

A number of US banks probably subscribe to the belief, 'If it ain't broke don't fix it.' Yet Dempster maintains that the "new cheque paradigm" in the US, and the move towards more electronic forms of payment, as well as the competitive threat posed by other banks and non-bank providers (for example, Wal-Mart), means US banks will be forced to move to a "continuous processing model" in order to compete and provide more competitive products.

Other global banking solution providers such as SAP/Accenture, Infosys/Finnacle and Oracle/i-flex are also looking to penetrate the US market. And whilst Metavante and Temenos believe their US market knowledge gives them a critical advantage over these providers, one cannot ignore the the 'stack' approach of competitors such as Oracle which is stitching different applications together including CRM, ERP and core banking software as part of its Fusion middleware strategy.

Mere mention of Oracle, however, is always guaranteed to arouse a passionate response. Alex Groenendyk, president, Americas, Temenos, maintains that Oracle is not a favoured supplier to the financial services industry and that Metavante's knowledge of the US banking market is unrivalled.

Dempster of Metavante expanded the point further saying, "Large US banks do not want an enterprise model. They want modular components that will interoperate with their existing architecture." Dempster believes that Oracle and SAP will suffer from their "tight connection" to Fusion and NetWeaver.

Andreades of Temenos is more passionate in his response to the competitive threat posed by Oracle/i-flex. "If you give your database model and applications to a single vendor (namely Oracle), you have given your business to that vendor to run. We don't believe the stack is the way to go."