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4/15/2013
01:52 PM
Wayne Busch
Wayne Busch
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Banks Must Ditch Legacy IT

Banks with decades-old IT systems are struggling to adjust to the changing regulatory and financial landscape.

Three factors that didn't exist a few years ago are driving banks to modernize their core systems:

1. Customer Centricity

Banks are facing restless customers who aren't particularly loyal. Yet most banks still operate in product silos -- internal walls that limit flexibility and impede their ability to view the entire customer relationship. A customer-centric bank, on the other hand, can view customers across product lines, use analytics to understand relationships, and price products tailored to specific customer segments. One European financial services institution, for example, combined customers' social media profiles, such as Twitter accounts, with card-spending patterns to better target customers for cross-selling products and services.

Banks with strong customer-centric models are seeing sales campaign success rates improve by 50%-200% and customer attrition fall by up to 5%, Accenture research finds. And they have been able to sell more products per customer -- up to four on average.

2. Lost Revenue And Cost Pressures

Recent reforms such as the Dodd-Frank Act and new regulations by the Consumer Financial Protection Bureau are proving extremely costly to the banking industry. Lucrative sources of non-interest income such as debit card fees and proprietary trading are being curtailed while compliance costs are increasing. The new regulatory environment is forcing many banks to rethink their business strategy.

Migrating to a modern core platform may help reduce cost-to-income ratios by up to 20 percentage points while letting banks push new products out more quickly. Replacing legacy applications with a single integrated platform means IT will perform less maintenance and can use standardized components so it writes less code.

A core transformation should go beyond IT to improve productivity in business operations. The ability to open accounts more quickly, modify product features or process customer transactions reduces "handoffs" between people and systems. It could even reduce fraud by lowering the number of exceptions resulting from reconciliation activities -- for example, unsigned checks or checks written against insufficient funds.

3. Foreign Competition

Several foreign banks from Spain, Canada and Asia have entered the U.S. market in recent years, and many bring a customer-centric business model -- as opposed to the product-centric model at most U.S. banks -- made possible by an integrated IT platform. For example, BBVA Compass, one of Accenture's Alnova core banking customers, replaced its core technology infrastructure for checking and savings, consumer and business lending, and mortgages, and has cut the time it takes to open a new deposit account from more than 40 minutes to as little as five.

Banks attempting a core system change must balance speed of implementation with delivery risk and cost. Some institutions do opt for the big-bang approach, in which they effectively cut over to all new systems at once. But most break up the effort into manageable releases -- by application (deposits, loans, etc.), geography, customer group or branch -- to reduce operational and delivery risk.

Will these new forces drive banks to rethink their approach to doing business -- to spur the 80% in the Aite Group's research who don't have a "high urgency" about replacing their core systems? Clearly, we think pouring money into outdated systems is not a winning proposition. Better to lay down the technology groundwork now to achieve long-term growth and profitability.

With just a smartphone, users can conduct nearly all their banking business at any time of the day or night. All this flexibility and convenience opens up new avenues for fraud and cybercrime. Guidelines laid out by the FFIEC several years ago predate many of the capabilities -- and vulnerabilities -- that are in place today. The How To Boost Security Via FFIEC Compliance report explains the latest guidelines and provides advice on how you can extend the work done to comply with FFIEC guidelines to strengthen your organization's overall security posture and keep customers and their data safe. (Free registration required

Juan Pedro Moreno is global managing director of Accenture's Banking practice.

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Mike_Acker
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Mike_Acker,
User Rank: Apprentice
4/21/2013 | 11:23:23 AM
re: Banks Must Ditch Legacy IT
="why spend millions of dollars overhauling an existing system"

as Bruce Schneier has pointed out: we won't see any improvement until there is a financial incentive. This means extending product liability law to the banks,-- AND to the O/S software OEM.

It isn't right to hold a bank liable for a fraudulent EFT made by an infected endpoint computer.

The correction then involves locking and certifying the ENDPOINT computer systems. Until people get ready to do this the Happy Hacker will continue
RoadTrip2011
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RoadTrip2011,
User Rank: Apprentice
4/20/2013 | 4:30:09 AM
re: Banks Must Ditch Legacy IT
I'm a recent hire at a top ten US bank. If they got the most modern system in the world it would be legacy as soon as this IT dept got their hands on it. The Java apps created by the developers are tightly coupled to the version of the Websphere IDE the app was created with. When they need to work on a different app, these guys wait a few days for desktop services to install a different version of Websphere IDE on their desktop. Can you freaking imagine? I hope Google gets into the banking business and wipes these guys out.
Mike_Acker
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Mike_Acker,
User Rank: Apprentice
4/19/2013 | 11:54:31 AM
re: Banks Must Ditch Legacy IT
Banks and People need to learn how to AUTHENTICATE transactions is our modern digital society. Paper based procedures from the 1950s do not provide the security needed in our digital environment

this means companies and people learning to use ( e.g. ) PGP signatures . The process isn't difficult -- but you do have to learn to do it . or get hacked.

it doens't make any difference if you use a System/360 or an iPhone the problem is the same: you must learn to identify yourself from a device that is inherrently anonymous.
Andrew Hornback
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Andrew Hornback,
User Rank: Apprentice
4/18/2013 | 2:34:49 AM
re: Banks Must Ditch Legacy IT
I've heard similar arguments, for similar reasons, in the engineering computing realm - people feeling the need to try to replace highly technical applications written in Fortran with the language/flavor of the week. Why doesn't this approach work?

1. The folks that created the original applications are probably no longer with the organization - How many banks still have people on staff from 40 years ago, in the same technical positions that they had at that time? VERY few.
2. How well documented is the original application? If you have to go back and re-engineer an application because of a lack of properly documented code, the sheer manpower and man hour requirement to make that happen is going to turn off a lot of execs with the mindset of "If it's not broke, don't fix it." - but then these are the same folks who might start the project with the organization and not be around by the time the delivery is planned 3-4 years down the road.
3. ROI - why spend millions of dollars overhauling an existing system to replace it with something that does the exact same function? As long as existing hardware systems are supported by the manufacturer or a trusted third-party, there's no impetus to make a move from that standpoint and it creates a cottage industry (if one can call it that) that supports nothing but banking organizations.

Ultimately, it comes down to how much money is going to be made/saved by making the decision to move to a new system - and given the fuzzy math behind a lot of those calculations, once you start getting into the 7 figure range and higher, you'd better have some serious backup for those calculations.

That said, my mantra when I was in the consulting game was that upgrades are inevitable - doing them on your own time is much more cost effective than being forced into them by a system failure. Once a major bank starts having major technical failures, I think you'll see the temperature start to rise for other banking organizations to get going on their own modernization efforts.

Andrew Hornback
InformationWeek Contributor
keitha0000
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keitha0000,
User Rank: Strategist
4/17/2013 | 6:14:45 PM
re: Banks Must Ditch Legacy IT
I have to question the picture that you are painting here. The IT departments of the largest banks are not putting off modernization. They are in fact using a multitude of platforms, each best suited to the task that they are designed to handle. For example, mainframe systems are at the very core of the largest banks, because that platform is the best tool available to manage the highest transaction rates in the world. Now, banks, or any other organization that relies on powerful IT systems at their core, must use the best systems available for specific tasks. Any bank that is using mainframe systems for ALL of its workloads just wouldn't be able to stay in business. That is why most businesses have dumped mainframe use for most purposes. Except one- processes that require tremendous throughput-- like transaction processing. For most other workloads, I would agree- offload as much as you can to cheaper PC-based servers. But only those workloads that make sense...
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