Phasing In Core Conversions

CU360
June 17, 2009 | COMMENTS

Last year, Bank Systems & Technology magazine said 2009 would finally be the year when financial institutions got behind the idea of core systems replacements. Then some of the most prestigious financial institutions in the world went belly-up, the credit markets froze, and segments of the financial industry imploded.

Now, caught between the need to upgrade core systems to cope with a hyper-regulated, risk-averse environment and a severe recession, financial institutions are choosing to extend the capabilities of their legacy core systems.

“Financial institutions are retrenching, and spending is tight right now,” one bank technology leader tells the magazine, suggesting that core replacements simply aren't in most financial institutions budgets right now.

What institutions need now is stronger risk management, greater transparency, and more aggressive customer-retention capabilities. As a result, financial institutions are upgrading their core systems in these areas while making do elsewhere.

A Phased Approach

Financial institutions must approach core transformation cautiously, particularly in this business environment, Mike Barba, manager with SMART Consulting, tells the magazine. He advises institutions to take a phased approach to refreshing their core systems, starting with one component, such as a risk-management module, rather than attempting a complete “rip and replace.”

“Try to accomplish specific goals,” Barba says. “The challenge for executives is being in crisis mode and surviving versus planning for the future. When you take a short-sighted approach, history tends to repeat itself.”

Core replacement is no longer an all-or-nothing project, explains Patti Reynolds, of MasterCard Advisors. “When you talk about the infrastructure supporting core systems, it's either viewed as an enabler or an inhibitor to an institution's growth and efficiency,” she tells the magazine. “We're telling clients to look for places where they can decouple their systems and find alternative solutions that can be integrated with the core, so I think you'll be seeing a lot of work-arounds.”

When MasterCard replaced its core systems between 1999 and 2003, it built a service-oriented architecture (SOA) to create a flexible infrastructure capable of accommodating various payments channels. SOA lets different software applications share data, which increases the system's efficiency and compatibility.

As an added benefit, developers of the MasterCard system were able to reuse many services during its core conversion using SOA and standardized processes. Using an SOA is essential when taking the piecemeal route to upgrading core systems, says

Jim Dempster, a senior vice president with Metavante. “SOA leads to strong integration that connects diverse technology,” he says.

Another approach that can help financial institutions extend their core systems is the concept of software as a service (SaaS). SaaS is a model of software deployment whereby a provider licenses an application to customers to use as a service on demand.

SaaS software vendors host the application on their own Web servers or download the application to the consumer's device, disabling it after use or after the on-demand contract expires.

The on-demand function can be handled internally to share licenses within a firm or by a thirdparty service provider sharing licenses between firms. Although Barba believes SaaS is still evolving, he sees great potential in the model.

“SaaS can help a financial institution in crisis mode by offering pieces of a solution to use and pay for as needed,” he explains.

Pilot programs are also a good way for financial institutions to kick-start core systems transformations while keeping implementation risk at a minimum. Pilot projects can be useful, especially in situations where the institution knows it must do something about a particular service or operation.

These projects can be used to test a new infrastructure that could then be rolled out across the entire organization after its successful small scale use.