It has been years since the banking industry made any large investments in core IT systems, but some of the largest financial services firms in the U.S. are now in the midst of rolling out multi-million dollar projects, according to industry experts.
Ten years ago, top-tier banks moved to replace decades-old Cobol-based core systems, with open, Web-enabled applications.
Now, some of those same top-tier banks are in the midst of another major initiative to convert to real-time mobile applications for retail services such as savings and checking accounts and lending systems. The idea is to grab more business -- and money -- from customers.
According to consultancy and research firm Celent, Citi bank is now moving to FIS Systematics from an older, internally developed system. Similarly, Union Bank in California is moving away from a brittle internal system to Infosys Finacle. And BBVA Compass is moving to Accenture's Alnova core banking software.
"Five of the top 20 banks are engaged in some sort of core banking replacement and we expect to see another three or four in next 12 months," said Fiaz Sindhu, who leads Accenture's North American core banking practice. "They're looking at those upgrades as a path to growth."
The best predictor of a core migration is far and away a merger or acquisition within the same country. Acquiring a bank in another country does not necessarily drive a core migration, according to a Celent report released earlier this year.
When Associated Bank in Green Bay acquired State Financial Bank in 2006 and First National Bank of Hudson in 2007, it set about consolidating its storage resources and brought all of its core transaction processing systems in-house.
Dan Marbes, a systems engineer at Associated Bank, said his company is migrating to IBM iSeries servers and has virtualized 75% of its 800 core data center servers and increased its storage arrays from one to eight with 900TB capacity. The bank, which has 300 branches throughout Illinois, Minnesota, and Wisconsin, had been using Fiserv to host its applications.
"With our online banking portal, we now have the ability to do instant file transfers and we continue to upgrade things like our automated teller system," Marbes said. For example, check image transfers at ATMs are much faster than they were on the bank's old centralized image-capture system.
The bank's storage systems have grown by 200TB in the last year alone, mostly due to new production systems coming on board. Those new systems increased data retention demands in order to meet regulatory requirements.
"I'm always surprised that people don't talk about the significant effect of virtualization on the I/O characteristics of storage. When you're putting production SQL, Exchange and Web workloads on them..., those types of workloads have a much different demand on the back-end storage than a some archive volumes," he said.
The bank is using storage area networks (SANs) from Compellent, which gives it a pool of virtualized capacity that can automatically expand with increased use. The arrays also allow data to be tiered across serial SCSI (SAS) and serial ATA (SATA) drives, depending on performance needs.
Banks that do not upgrade their core systems face a competitive disadvantage, according to financial research and consulting firm Aite Group. Aite Group estimates that about 20% of U.S. financial institutions have reached a high level of urgency in replacing their core systems, meaning that by not replacing those systems they could lose business to more flexible competitors.
In addition to institutions in the "high urgency" category, 56% of U.S. banks and credit unions would benefit from a core system replacement or transformation, Aite said.
"To capitalize on the new business opportunities coming to market, it is essential that core vendors not only offer a broad portfolio of tightly integrated solutions, but that they implement a unified go-to-market strategy across their organization," Christine Barry, research director with Aite Group, said.
For BBVA, moving away from a homegrown system to Alnova Financial Solutions was all about flexibility.
The bank currently uses Alnova in 30 other countries, and it will soon support BBVA Compass' operations across Texas, New Mexico, Florida, Colorado, California, Arizona and Alabama. It's designed to improve the bank's cross-selling and customer retention, and to boost efficiencies by integrating its U.S. banking network with global operations on a single platform.
Alnova will also deliver real-time bank processing capabilities and support higher transaction volumes.
Robert Hunt, a research director with market research firm TowerGroup's Retail Banking business, believes BBVA's multi-million dollar change-out may be key in driving industry-wide core system updates.
"There's only a handful of others under way now," he said. "I think we're still a couple years from seeing a significant increase. But, I think [BBVA] is one of the banks that will drive others -- if it does well."
Hunt noted that the trend toward real-time transaction banking, where, for example, a person can immediately transfer money from checking to savings using a mobile device, is being driven by the European market. In Europe, not only have many leading banks embraced real-time transactions, but they've also increased the efficiency of their core systems, reducing operating expenses.
For example, Spanish banks spend on average about 40 cents of every dollar in revenue on operating expenses; in the U.S., that avergae is 60 cents for every dollar of revenue.
"Real time transactional systems increase efficiency because they take out some of the back-end processing cost. If I can do everything at one point of contact, I'm not using additional personnel to mange it," Hunt said.
At the same time, core system change-outs are multi-year projects that run into hundreds of millions of dollars for large enterprises, Hunt said.
"You have to reduce costs 20% to 30% not just in year one but every year going forward to justify it," he said.
"In this new banking environment, having an efficient and highly flexible technology system is critical to outperforming the competition and meeting new regulatory requirements," Manolo Sanchez, CEO of BBVA Compass, said in a statement.
Bruce Voelker, managing director of Accenture's U.S. banking practice, said retail banking is under tremendous pressure to grow business outside of acquisitions. That means they must build customer-centric, not product-centric, applications.
"They're going after changes to core-banking applications and systems to allow them to be faster in time-to- market and smarter in the customer segments," Voelker said.
Accenture's Sindhu added that increased federal regulations have also put pressure on banks to upgrade systems. For example, last year the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as Regulation E or the Electronic Funds Transfer Act, changed the amount of fees banks could charge on debit cards and for overdrafts. Some institutions lost as much as half of their fee income because of the changes, Sindhu said.
"One way to make up that money is by increasing their product share of the customer," he said, referring to the number of services a customer uses from the same bank.
With bank loyalty at an all-time low, institutions that add real-time mobile applications have an advantage to take business away from banks that don't offer the same services.
For example, real-time account money transfers and mobile check image capture are among the more popular features customers are looking to use, Sindhu said.
"If you're going to spend $100 million to $150 million dollars to implement technology to address regulatory change, that's as much as ... you'd spend to change our your core banking, so you might as well address centricity and speed to market, too," Voelker said.
Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at @lucasmearian or subscribe to Lucas's RSS feed . His e-mail address is firstname.lastname@example.org .
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