The banking industry is staring at a major challenge: how to drive growth, attract new customers and slice costs while relying on 40-year old technology systems. Even with constrained IT budgets, many banks need to modernize the aging systems that run their core operations -- deposit gathering, lending, mortgages, cards and online banking.
Banks have had their reasons to put off modernization. In the pre-financial crisis years, with profits flush, there wasn't a big incentive to make the big investment and take the risk of a large modernization project. Instead, banks opted for smaller, less costly alternatives such as product or feature enhancements, which often added complexity to their environments
Additionally, during years of acquisitions -- there have been nearly 250 large mergers since 1990 -- most spending on core platforms was focused on integrating acquired banks' systems onto their own, rather than on improving capabilities. This left little time or dollars for simplification. The result -- a spaghetti-like maze of legacy systems -- was expensive to maintain but generally considered to be the cost of doing business.
But that is no longer the case. The banking industry's new world order is marked by regulations requiring greater transparency, more self-sufficient customers with rising expectations, stronger competition from traditional and non-traditional players, and relentless cost pressures.
Customers expect banks' systems to be flexible enough to give them one experience across channels -- branch, ATMs, online banking, mobile banking and even social media. That means, for example, enabling a customer to start her mortgage application process online and finish it at the branch or by phone with a customer service representative, without starting over. And, in today's slow growth environment, banks must be able to leverage their oceans of customer data to exploit cross-sell opportunities -- such as marketing investment products to that same mortgage customer -- and quickly bring new products to market.
Yet many banks' core systems are a significant obstacle to achieving these strategic objectives. Some financial institutions, for example, run different platforms for related products. Thus, consumer loans run on a completely separate system from consumer deposits which, in turn, run on a separate platform from commercial deposits. The data is not integrated for these systems except on the backend. Some larger banks may have multiple platforms for the same line of business across multiple regions.
Bank execs resist a core transformation of their systems because it's such a daunting undertaking. We know this because Accenture sells software and services tied to these kinds of transformations.
The financial investment can be substantial, requiring in some cases investments of hundreds of millions of dollars and a time horizon of three years or longer, depending on the scope of the project. When these projects go wrong, the result can be delays, cost overruns and customer service disruptions. Setting aside time for lengthy employee training is another factor to consider. Historically, many bank executives have adopted a "not on my watch" attitude due to the potential risks of a modernization.
Three Factors Changing Banking IT Needs
Unlike traditional legacy systems, the promise of modernized core systems is that using a modern architecture including components that banks can quickly configure will make it easier to design and deliver new products and services. Advances in enabling technologies such as service-oriented architectures are making transformations more manageable and affordable.
Currently, several of the top 20 U.S. banks are engaged in core banking upgrades -- whether full-blown system replacements or incremental modernization. Approximately 20% of U.S. banks have reached a high level of urgency regarding replacing their core systems, the research firm Aite Group finds, and an additional 56% would benefit significantly from a replacement.
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.
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Juan Pedro Moreno is global managing director of Accenture's Banking practice.