Core Banking Legacy Systems Replacement

Core Banking Legacy Systems Replacement

Globally,core banking legacy systems replacement projects have been successful. The ever-increasing aspect of growth experienced in the core banking sector and the need for flexibility is overwhelming. Legacy systems enhance the vulnerability of the banking process. The core banking legacy systems are linked with the traditional inbuilt model, which cannot accommodate the rapid growth and agility requirements of the current state.

One constant argument is that no legacy operating system can continue forever. One day, the operating costs and inconvenience of maintaining a legacy system will tip the balance in favor of an upgrade. The trick is to know when that time has arrived.

Globally, banks are retiring their legacy systems. They are encouraged by ‘good stories’ of other banks that have successfully retired their own legacy platforms and have moved to modern core banking platforms, like the Commonwealth Bank of Australia and BBV Compass. This article is based upon secondary data research, which aims to identify and understand the banks’ choices for their new core banking platform when they retire their legacy systems.

We collated 40 records of banks that have replaced their core banking legacy systems. Although the data sample is small, it is safe to assume that Infosys Finacle, Oracle Flexcube, SAP Banking, FIS Systematics, and Fiserv were the favorite choices and comprise 77.5% of the surveyed cases opted for one of these core banking systems.

List of Core Banking Platforms
List of Core Banking Platforms
Core Banking Legacy Systems Replacement
Core Banking Legacy Systems Replacement

 

Why Retire Core Banking Legacy Systems?

  1. Change is inevitable: Change is inevitable, and the earlier the banks embrace it, the better. According to Celent, a Fintech research company, banks spend most of their IT dollars on keeping their legacy systems up and running. Out of the total IT investment in 2015, Celent estimates 75.4%, or $148.3 billion, was spent on maintenance. This is a good enough reason to consider alternatives to the legacy systems. Besides the maintenance costs, technologies used in the legacy systems is a handicap to innovation and scalability.
  2. Low-tech digital experience: Legacy systems are a barrier to the bank’s ability to provide the high-quality digital experience that the users are accustomed to being delivered through the Internet and mobile applications. Banks are unable to personalize the customer experience to the extent that applications like Google+, Facebook, and other networking sites provide. Customers not only want to be able to access banking services anywhere, anytime, but they want the same visual, audio, and touchscreen interaction that they have been receiving from other companies.
  3. Complexity: As the technology evolved, banks patched and updated their legacy systems to provide more user-friendly interfaces. Unfortunately, in some cases, this resulted in inefficient back-end processing. According to a BankingTech.com journalist, “one UK bank is still using a system based in pounds, shillings and pence, with the front end forced to perform multiple conversions. This implies that when a customer looks at her/his bank balance on a mobile application, this goes through multiple layers of IT coding to get to that number.”
  4. Skills shortage: To a large extent, legacy systems are managed by employees that are on their way out. Ultimately, in a few years, the pool of legacy skills is bound to run out of available resources.
  5. System failures: Age may well be just a number, but banking technology failures around the world in the past few years have drawn the ire of customers, who are not slow to voice their disapproval on social media. This is something that was unheard of 40 years ago. In the case of Royal Bank of Scotland, customers at one stage were unable to access cash or process card transactions for over three hours. While not directly attributing the problem to the legacy applications, the CEO of RBS, Ross McEwan, said that the company had been failing to invest properly in its systems for decades.
  6. Standardization requirements: While legacy systems have their own internal standards, they are not standardized enough to enable them to easily interact with external systems that do not form part of their business network.
  7. Wrapping and ‘spaghetti code’: Legacy systems today are wrapped around by new applications that provide better user interfaces and features. Keeping the core system and the outer shell synchronized requires complex coding, sometimes resulting in a ‘spaghetti’ effect. In the legacy years, developers talked about this phenomenon as the ‘brown paper and string’ method of fixing code or making so-called enhancements.
  8. Real-time processing: Legacy systems were designed to run transaction processes in batches, usually overnight. Today, customers want updates on all their devices immediately upon completing a transaction. If they make a deposit at a branch, they want to walk out and check their account balance on their mobile phones rather than receiving a letter in the post two days later.

Knowing When It’s Time to Retire Legacy Systems

A good example of legacy system vulnerability is the case of the Royal Bank of Scotland (RBS). In 2000, RBS acquired NatWest and subsequently ABN Amro as part of a consortium in 2007. It has since been bailed out by the state and has pulled out from the investment business but has suffered public IT disasters.

  1. In 2012 challenges with IT legacy systems at RBS left customers unable to access their accounts for many days. The problem in the CA7 batch process scheduler led to the freezing of 12 million customer accounts. Customers of the bank were denied access to funds for a week or more as the banks manually updated their accounts.
  2. In December 2013, on the busiest shopping day of the year, IT problems stopped customers from making online and card payments. RBS admitted that its IT systems needed an overhaul after decades of under-investment.
  3. In June 2016, RBS experienced another IT glitch. According to the bank, “customers scheduled to receive 600,000 payments, failed to enter the accounts overnight”.

Even though the bank did not directly relate these failures to its core banking legacy systems, there is a consensus amongst analysts that these failures have all the marks of a legacy system failure.

Another example in 2014 is the Lloyds Banking Group, where customers were hit by payment problems after an IT and server failure. It left customers unable to use ATMs for cash dispensation, and debit card transactions were declined for two to three hours. While the problem of a server failure at Lloyds Banking Group was not as enormous as that at RBS, it is a clear demonstration and sign that aging IT systems and servers require a serious overhaul.

The Spanish bank Santander, which over the past few years has swallowed up many other financial institutions (Abbey National, Bradford and Bingley, Alliance and Leicester), still uses the same legacy system. A significant number of banks still operate their core banking with the legacy systems.

The costs and other challenges associated with core banking legacy systems replacement projects inhibit the modernization of banking IT platforms. The cost involved in systems modernization is high. The cost of core banking legacy systems retirement, as reported by banks, varied between $35 million and $1 billion. However, those who took the plunge are celebrating their achievements. The Commonwealth Bank of Australia and BBV Compass have taken on the challenge and have retired their core banking legacy systems.

References:

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