A changing economy and increased regulatory requirements have put increased pressure on banks and their core banking systems. However, according to the 2008 Core Banking Systems Survey from Capgemini, almost all of the top retail banks globally are still using legacy systems dating from the 1960s and 1970s in domestic markets; despite the growth of packaged banking solutions in international operations over the last three decades.
To sustain growth under recent banking pressures and continued regulatory requirements, it is essential for banks to have the right core banking systems in place.
While a large bulk of package sales are still within Tier 3 and 4 banks, signs of larger, more strategic decisions are emerging with select Tier 1 and 2 which require sophisticated software able to process huge quantities of data and want to gain a single view of the customer.
Beyond the financial drivers, IT globalisation, increasing compliance and industry consolidation are some of the other key motivators for core banking system replacement, says Michael Roussouw, vice-president of Gemini Consulting.
As a result, the primary drivers for system replacement are shifting from cost reduction to growth.
"To react to trends, a bank's key support systems need to be transformed," he says. "International legislation and regulation necessitate more transparent and understandable products; increased flexibility, such as adaptable mortgage products, as required by some customers, while flexible credit lines have proved to be too risky for other customers (who need more controlled finances); and changes to pricing structures such as the introduction of risk-based pricing and tax-friendly
bank savings ,are required to attract customers. Such changes would enable banks to compete with insurance companies in tax-friendly products.
"Package solutions have come a long way in terms of functionality, but implementations in tier one and two banks remain extremely large and complex," Roussouw adds.
"Banks willing to tackle planning and governance challenges can derive significant benefits including meeting compliance demands, control over data management issues and a single view of their customer base by driving the replacement of outdated core banking systems.
"Banks should evaluate the packages available and work with technology partners to develop systems that deliver competitive advantage and enable them to prosper in this new environment."