Core Systems

03:15 PM
Paul Schaus
Paul Schaus
Commentary
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The Truth About Core

Why aversion to conversion is bad for your bank.

Other than the words "financial meltdown," the two words that strike the most fear in bankers are "core conversion." Yes, I'm talking about the multi-year, multimillion-dollar projects that most bank technology professionals won't touch with a 10-foot pole.

It's not just the project length and cost that bankers fear. It's also the perception that a conversion to another core vendor would put the bank in the regulatory spotlight. For instance, the OCC requires bankers to outline the strategic purpose, legal and compliance aspects, and inherent risks associated with using third parties and be able to discuss how the arrangement aligns with the bank's overall strategic goals, objectives, and risk appetite.

Bankers reason that regulators want them to remain (stay hostage?) with one of the big three core processing vendors. It seems like an easier decision, but is it?

Fear of conversion is actually putting your bank at risk, because the legacy infrastructure of older core systems makes it difficult to be nimble. At the very least, operating on the exact same infrastructure as every other bank in your peer group means you can't stand out.

One banker told me that his bank would remain with the same core vendor as the bank down the street, so that it would be easier for his bank to copycat new products the competitor offered. This banker clearly wasn't seeing the advantages of differentiation as a strategy.

Here are two truths about the current state of core processing systems that will hopefully get you at least to consider why the path of least resistance may be bad for your bank.

Truth 1: Innovation stalled in 1986
What were you doing in 1986? Chances are you weren't surfing the Internet, unless you were in academia or worked for the government and had access to ARPANET, the predecessor of our modern-day Internet.

You certainly weren't performing a Google search. In 1986, Larry Page and Sergey Brin were 13 years old.

In 1986, we saw the last major innovation in core systems by a vanguard domestic core vendor, when Jack Henry & Associates released SilverLake, a core processing system designed to run on IBM's System 38, a then-revolutionary midrange computer.

Since 1986, there have been numerous enhancements, but the majority of US banks are still running on batch processing systems designed nearly 30 years ago.

These core systems were designed in a different era -- one of dumb terminals and green screens. It was an era in which women wore "power suits" with padded shoulders. Top Gun was the top-grossing film of the year.

Sure, you can layer ancillary systems on top of the core, but what's the cost to do so? Of course, core vendors are more than happy to sell or "bundle" ancillary systems on to the core, and banks seem willing to pay.

Truth 2: Innovation is happening, but you have to look hard to find it
I call out the big three domestic core system vendors for their lack of innovation in the core space after 1986, but the international stage is different. Several vendors with modern-architecture core systems are making inroads into the US market.

International vendors stayed away from the US due to the hassles of making their systems compliant with US regulations. However, a trend toward global standards such as Basel III means that, from a regulatory perspective, the US market won't look so very different from the international market in the future. Core vendors will still need to retool their systems significantly to comply with US-centric standards, but it is lot closer.

International core vendors are gaining traction. Tata Consultancy Services recently signed a $200 million deal with Zions Bancorp in Salt Lake City. Temenos, which basically rewrote its core system in 2004 to make it database independent, purchased TriNovus of Birmingham, Ala., and has announced that it is expanding its US operations.

So if innovation by the big three domestic core vendors stopped in 1986, and international core vendors are designing systems using new platforms and technology, what does that mean for the core banking market? Do the vanguard domestic technology vendors have the foundation to support the future direction of core, or will one of the new or global vendors take the business away with more modern systems?

You may want to reconsider your core banking options. Staying complacent might not be your best strategy.

Paul Schaus is the president, CEO and founder of CCG Catalyst, a bank consulting firm providing strategic direction for banks. He leads a team of banking subject matter experts across North America. In addition to maintaining the firm's traditional consulting of business and ... View Full Bio

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jschlesinger
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jschlesinger,
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11/22/2014 | 12:15:55 PM
Temenos
Thanks for mentioning us just a couple of points. Firstly the spelling in case anyone wants to search for us. Secondly we made a major change in 2004 but it wasn't supporting Oracle, DB2 and SQL Server, which we did earlier, it was to run non-stop. The core does not stop to run the accounting. Also neither update was a re-write, we just changed the platform code not the core code. In 2011 we moved to Java EE and in 2012 we added real time multipoint integration. In 2013 we introduced headless interaction. This year we introduced multitenancy and next year we will introduce a real time reporting database. The innovation never stops when providing the world's best core banking system.
Jonathan_Camhi
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Jonathan_Camhi,
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11/23/2014 | 8:38:44 PM
International Innovation
You're right on Paul about the international providers doing interesting things and expanding into the States. I think that's a key trend to watch in banking IT for the next few years: how those solutions are adopted as the initial projects start to show results.
Greg MacSweeney
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Greg MacSweeney,
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11/25/2014 | 6:17:16 AM
1986
It's eye opening, when you put banking innovation in this timeframe. Replacing a core system is no easy task, is extremely costly and carries a lot of risk. Still, you would think that banks would have moved off of batch systems in the time since the Mets won the World Series, Iran-Contra, and Top Gun (the movie) were making headlines.
Jonathan_Camhi
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Jonathan_Camhi,
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11/25/2014 | 1:19:40 PM
Re: 1986
I hope most banks aren't waiting for the Mets to win the World Series again before they upgrade their core systems. That would be a long wait.
Greg MacSweeney
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Greg MacSweeney,
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11/25/2014 | 2:33:02 PM
Re: 1986
Well, at least 1986 for the Mets is better than the 1908 for the Cubs, which was about 50 years before mainframes became available. ;)
Alex Lopatine
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Alex Lopatine,
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4/23/2015 | 8:15:03 PM
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EternalbanYanTree
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EternalbanYanTree,
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4/23/2016 | 10:59:46 AM
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hugo550
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hugo550,
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7/12/2016 | 10:47:19 AM
Re: Temenos
oh yes !! Great!
umutarcn
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umutarcn,
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8/12/2016 | 7:33:30 PM
Sample Images : Images Fathers Day, Happy Halloween
Great article thank you.
lucasdigne
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lucasdigne,
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9/21/2016 | 5:14:59 AM
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