Core Banking Transformation: Not Only Why and What, but Also When
A board member of the Co-operative Financial Services, U.K. and the leader of their core banking transformation initiative made a very interesting comment about their transformation experience. He said that they could see the signs, which told them that it was the right time to transform.
Indeed, when is the right time for transformation?
While there's no simple answer to that, the outer time limit for transformation is when:
• The cost of maintaining legacy systems becomes untenable for the bank
• The legacy systems' lack of capability seriously hampers growth, performance and competitiveness or the bank's ability to fulfill new demands
Everything else is determined by circumstances. For instance, quite some years ago, a research firm reported that European banks were focused on achieving greater efficiency through core transformation; American institutions were more concerned with functionality and time to market; For Asia, 'scalability' and 'cost considerations' are driving the core replacements. Whereas for Latin America, banks are being driven by their multinational parent banks' agenda of cross-border standardization.
Obviously, geography isn't the only factor.
In good times, banks look to strengthen capability and growth - so their core transformation purpose is all about adding channels and scale. In tough times - as we've seen through the last crisis - the focus shifts to efficiency and creating competitive edge through better service and experience. M&A gives acquiring banks a solid motive for transformation, namely, integrating the systems of acquired banks with their own.
There's also the question of when to replace rather than merely renew. Renewal is tempting because it mitigates the considerable risks and cost of transformation. But, as legacy applications get more tangled, their maintenance cost goes through the roof. Also, beyond a point, it is not possible to 'work-around' the limitations of the system. Hence, sooner or a later a bank is left with no choice but to replace its systems.
That decision has become easier because core banking packages have evolved substantially to reduce replacement risk. However, once again, the bank is faced with a couple of questions - whether to move to the new system at one go or do it in phases. While going all out is risky, it costs less than phased replacement, and hence might be a better option for banks with limited resources. Sometimes, when the old systems are impossibly snarled, it's also the only way.
Big banks, however, will almost always take the phased route. But once again, they have to decide between several approaches. In your experience, which ones work best for them?
